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The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition?

  • Karlinger, Liliane

Summary This paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s. I propose a novel explanation for this phenomenon: the sharp increase in market competition worldwide, which reduces prices and profits and drives firms into the shadow economy. Empirical evidence from a panel covering 45 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy. The effect is strongest in low-tax, high-corruption countries that do not provide the public services which make it worthwhile for firms to remain official despite growing competitive pressure.

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Article provided by Elsevier in its journal World Development.

Volume (Year): 37 (2009)
Issue (Month): 10 (October)
Pages: 1600-1611

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Handle: RePEc:eee:wdevel:v:37:y:2009:i:10:p:1600-1611
Contact details of provider: Web page: http://www.elsevier.com/locate/worlddev

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  5. Liliane Karlinger, 2008. "Globalizing Tax Evasion: How Competition Affects the Size of the Underground Economy," Vienna Economics Papers 0801, University of Vienna, Department of Economics.
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