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Shadow Economy, Rent-Seeking Activities and the Perils of Reinforcement of the Rule of Law

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  • Ekaterina Vostroknutova

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Abstract

An economy is considered where a possibility to seek rents (a particular case of this activity is corruption) exists along with production. A producer is able to hide part of his output from both bribery and taxation. It is shown that the presence of a shadow sector has di?erent e?ects in economies with high and low rent-seeking. As expected, in the economy with low corruption the direct law enforcement is bene- ficial for growth, and reduces the shadow sector. However, in the highly corrupt economy, combating the shadow economy reduces output and increases corruption, while combating corruption reduces the shadow economy.

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Bibliographic Info

Paper provided by William Davidson Institute at the University of Michigan in its series William Davidson Institute Working Papers Series with number 2003-578.

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Length: 23 pages
Date of creation: 12 Mar 2003
Date of revision:
Handle: RePEc:wdi:papers:2003-578

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Keywords: corruption; rent-seeking; shadow economy; law enforcement; transition;

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References

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  1. Krueger, Anne O, 1974. "The Political Economy of the Rent-Seeking Society," American Economic Review, American Economic Association, vol. 64(3), pages 291-303, June.
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Cited by:
  1. Clara Delavallade, 2011. "What Drives Corruption? Evidence from North African Firms," Working Papers 244, Economic Research Southern Africa.
  2. Maxim Bouev, 2005. "State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector," William Davidson Institute Working Papers Series wp764, William Davidson Institute at the University of Michigan.

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