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How do Institutions Affect Corruption and the Shadow Economy?

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Author Info
Axel Dreher (Konstanz University)
Christos Kotsogiannis (Exeter University)
Steve McCorriston (Exeter University)

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Abstract

This paper analyzes a simple model that captures the relationship between institutional quality, the shadow economy and corruption. It shows that an improvement in institutional quality reduces the shadow economy and affects the corruption market. The exact relationship between corruption and institutional quality is, however, ambiguous and depends on the relative effectiveness of the institutional quality in the shadow and corruption markets. The predictions of the model are empirically tested - by means of Structural Equation Modelling that treats the shadow economy and the corruption market as latent variables - using data from OECD countries. The results show that an improvement in institutional quality reduces the shadow economy directly and corruption both directly and indirectly (through its effect on the shadow market).

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Publisher Info
Paper provided by EconWPA in its series Public Economics with number 0502012.

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Date of creation: 22 Feb 2005
Date of revision: 24 Feb 2005
Handle: RePEc:wpa:wuwppe:0502012

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Related research
Keywords: Corruption; Shadow Economies; OECD countries; Latent Variables; Structural Equation Modelling;

Find related papers by JEL classification:
H10 - Public Economics - - Structure and Scope of Government - - - General
O1 - Economic Development, Technological Change, and Growth - - Economic Development
K49 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Other
C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 1999. "The Quality of Government," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 222-79, April.
    Other versions:
  2. Frey, Bruno S. & Weck-Hanneman, Hannelore, 1984. "The hidden economy as an 'unobserved' variable," European Economic Review, Elsevier, vol. 26(1-2), pages 33-53. [Downloadable!] (restricted)
  3. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1320-1346, September. [Downloadable!] (restricted)
  4. Tanzi, Vito, 1999. "Uses and Abuses of Estimates of the Underground Economy," Economic Journal, Royal Economic Society, vol. 109(456), pages F338-47, June. [Downloadable!] (restricted)
  5. Jain, Arvind K, 2001. " Corruption: A Review," Journal of Economic Surveys, Blackwell Publishing, vol. 15(1), pages 71-121, February. [Downloadable!] (restricted)
  6. Daniel Kaufmann & Shang-Jin Wei, 1999. "Does "Grease Money" Speed Up the Wheels of Commerce?," NBER Working Papers 7093, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Vito Tanzi, 1998. "Corruption Around the World - Causes, Consequences, Scope, and Cures," IMF Working Papers 98/63, International Monetary Fund.
  8. Kaufmann, Daniel & Kraay, Aart & Zoido-Lobaton, Pablo, 1999. "Governance matters," Policy Research Working Paper Series 2196, The World Bank. [Downloadable!]
  9. Hindriks, Jean & Keen, Michael & Muthoo, Abhinay, 1999. "Corruption, extortion and evasion," Journal of Public Economics, Elsevier, vol. 74(3), pages 395-430, December. [Downloadable!] (restricted)
    Other versions:
  10. Loayza, Norman V., 1996. "The economics of the informal sector: a simple model and some empirical evidence from Latin America," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 129-162, December. [Downloadable!] (restricted)
  11. Simeon Djankov & Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2002. "The Regulation Of Entry," The Quarterly Journal of Economics, MIT Press, vol. 117(1), pages 1-37, February. [Downloadable!] (restricted)
    Other versions:
  12. Bliss, Christopher & Di Tella, Rafael, 1997. "Does Competition Kill Corruption?," Journal of Political Economy, University of Chicago Press, vol. 105(5), pages 1001-23, October.
  13. Jay Pil Choi & Marcel Thum, 2002. "Corruption and the Shadow Economy," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  14. Giles, David E A, 1999. "Measuring the Hidden Economy: Implications for Econometric Modelling," Economic Journal, Royal Economic Society, vol. 109(456), pages F370-80, June. [Downloadable!] (restricted)
    Other versions:
  15. Shleifer, Andrei & Vishny, Robert W, 1993. "Corruption," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 599-617, August. [Downloadable!] (restricted)
    Other versions:
    • Andrei Shleifer & Robert W. Vishny, 1993. "Corruption," NBER Working Papers 4372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Friedrich Schneider & Dominik H. Enste, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Axel Dreher & Friedrich Schneider, 2006. "Corruption and the Shadow Economy: An Empirical Analysis," CREMA Working Paper Series 2006-01, Center for Research in Economics, Management and the Arts (CREMA). [Downloadable!]
    Other versions:
  2. Friedrich Schneider, 2006. "Shadow Economies and Corruption all over the World: What do we really Know?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Raghbendra Jha & T. Palanivel, 2007. "Resource Augmentation for Meeting the Millennium Development Goals in the Asia Pacific Region," ASARC Working Papers 2007-02, Australian National University, Australia South Asia Research Centre. [Downloadable!]
    Other versions:
  4. James Alm & Jorge Martinez-Vazquez, 2007. "Tax Morale and Tax Evasion in Latin America," International Studies Program Working Paper Series, at AYSPS, GSU paper0704, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
  5. Axel Dreher & Thomas Herzfeld, 2005. "The Economic Costs of Corruption: A Survey and New Evidence," Public Economics 0506001, EconWPA. [Downloadable!]
  6. James Alm & Jorge Martinez-Vazquez, 2007. "Tax Morale and Tax Evasion in Latin American Countries," International Studies Program Working Paper Series, at AYSPS, GSU paper0732, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
  7. Roberto Dell'Anno & Adalgiso Amendola, 2008. "Istituzioni, Diseguaglianza ed Economia Sommersa: quale relazione?," Quaderni DSEMS 24-2008, Dipartimento di Scienze Economiche, Matematiche e Statistiche, Universita' di Foggia. [Downloadable!]
  8. Schneider, Friedrich, 2007. "Shadow Economies and Corruption All Over the World: New Estimates for 145 Countries," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 1(9), pages 1-66. [Downloadable!]
  9. Buehn, Andreas & Schneider, Friedrich, 2009. "Corruption and the Shadow Economy: A Structural Equation Model Approach," IZA Discussion Papers 4182, Institute for the Study of Labor (IZA). [Downloadable!]
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