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Keeping both corruption and the shadow economy in check: the role of decentralization

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  • Roberto Dell’Anno
  • Désirée Teobaldelli

Abstract

This paper puts forward a framework for evaluating the effects of governmental decentralization on the shadow economy and corruption. The theoretical analysis demonstrates that decentralization exerts both a direct and an indirect impact on the shadow economy and corruption. First, decentralization helps to mitigate government-induced distortions, thus limiting the extent of corruption and the informal sector in a direct way. Second, in more decentralized systems, individuals have the option to avoid corruption by moving to other jurisdictions, rather than going underground. This limits the impact of corruption on the shadow economy and implies that decentralization is also beneficial in an indirect way. As a result, our analysis documents a positive relationship between corruption and the shadow economy; however, this link proves to be lower in decentralized countries. To test these predictions, we developed an empirical analysis based on a cross-country database of 145 countries that includes different indexes of decentralization, corruption and shadow economy. The empirical evidence is consistent with the theory. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Roberto Dell’Anno & Désirée Teobaldelli, 2015. "Keeping both corruption and the shadow economy in check: the role of decentralization," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(1), pages 1-40, February.
  • Handle: RePEc:kap:itaxpf:v:22:y:2015:i:1:p:1-40
    DOI: 10.1007/s10797-013-9298-4
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    2. Larissa Batrancea & Anca Nichita & Ioan Batrancea & Lucian Gaban, 2018. "The Strenght of the Relationship Between Shadow Economy and Corruption: Evidence from a Worldwide Country-Sample," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 138(3), pages 1119-1143, August.
    3. Désirée Teobaldelli & Friedrich Schneider, 2013. "The influence of direct democracy on the shadow economy," Public Choice, Springer, vol. 157(3), pages 543-567, December.
    4. Ibrahim Ngouhouo & Loudi Njoya & Simplice A. Asongu, 2022. "Corruption, Economic Growth and the Informal Sector: Empirical Evidence from Developing Countries," Working Papers of the African Governance and Development Institute. 22/014, African Governance and Development Institute..
    5. Aziz N. Berdiev & Rajeev K. Goel & James W. Saunoris, 2022. "Do disease epidemics force economic activity underground? International evidence," Contemporary Economic Policy, Western Economic Association International, vol. 40(2), pages 263-282, April.
    6. Eugen Dimant & Guglielmo Tosato, 2018. "Causes And Effects Of Corruption: What Has Past Decade'S Empirical Research Taught Us? A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 32(2), pages 335-356, April.
    7. Hailin Chen & Friedrich Schneider & Qunli Sun, 2018. "Size, Determinants, and Consequences of Corruption in China's Provinces: The MIMIC Approach," CESifo Working Paper Series 7175, CESifo.
    8. Claudiu T. Albulescu & Matei Tamasila & Ilie M. Taucean, 2016. "Shadow economy, tax policies, institutional weakness and financial stability in selected OECD countries," Economics Bulletin, AccessEcon, vol. 36(3), pages 1868-1875.
    9. Corneliu Sorin BAICU & Cristian Valentin HAPENCIUC, 2016. "Model Of Choices, Institutions And Direct Democracy Quasi-Economic Factors Of The Influence Of Underground Economy," EcoForum, "Stefan cel Mare" University of Suceava, Romania, Faculty of Economics and Public Administration - Economy, Business Administration and Tourism Department., vol. 5(2), pages 1-30, July.
    10. Belmonte, Alessandro & Dell'Anno, Roberto & Teobaldelli, Désirée, 2018. "Tax morale, aversion to ethnic diversity, and decentralization," European Journal of Political Economy, Elsevier, vol. 55(C), pages 204-223.
    11. Héctor Bellido & Lorena Olmos & Juan A. Román-Aso, 2021. "The influence of government ideology on corruption: the impact of the Great Recession," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 38(2), pages 677-708, July.
    12. Giombini, Germana & Teobaldelli, Désirée & Schneider, Friedrich, 2018. "Interaction effect of tax evasion and legal system inefficiency on firms' financial constraints," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 1-20.
    13. Rajeev K. Goel & James W. Saunoris, 2017. "Forms of government decentralization and institutional quality: evidence from a large sample of nations," Chapters, in: Naoyuki Yoshino & Peter J. Morgan (ed.), Central and Local Government Relations in Asia, chapter 12, pages 395-420, Edward Elgar Publishing.
    14. Feige, Edgar L., 2015. "Reflections on the meaning and measurement of Unobserved Economies: What do we really know about the “Shadow Economy”?," MPRA Paper 68466, University Library of Munich, Germany.
    15. Finocchiaro Castro ,Massimo & Guccio, Calogero, 2023. "New wine in old bottle: Exploring the Corruption-inefficiency nexus using endogenous stochastic frontier approach," EconStor Preprints 275730, ZBW - Leibniz Information Centre for Economics.
    16. Jetter, Michael & Parmeter, Christopher F., 2018. "Sorting through global corruption determinants: Institutions and education matter – Not culture," World Development, Elsevier, vol. 109(C), pages 279-294.
    17. Elena D’Agostino & Marco Alberto De Benedetto & Giuseppe Sobbrio, 2023. "Does the economic freedom hinder the underground economy? Evidence from a cross-country analysis," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 40(1), pages 319-341, April.
    18. Hailin Chen & Friedrich Schneider & Qunli Sun, 2020. "Measuring the size of the shadow economy in 30 provinces of China over 1995–2016: The MIMIC approach," Pacific Economic Review, Wiley Blackwell, vol. 25(3), pages 427-453, August.
    19. Jorge Martinez-Vazquez & Santiago Lago-Peñas & Agnese Sacchi, 2017. "The Impact Of Fiscal Decentralization: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(4), pages 1095-1129, September.
    20. Miguel Ángel Borrella-Mas & Martin Rode, 2021. "Love is blind: partisan alignment and political corruption in Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 12(3), pages 423-451, September.
    21. Rajeev K. Goel & James W. Saunoris, 2016. "Virtual Versus Physical Government Decentralization: Effects on Corruption and the Shadow Economy," Public Budgeting & Finance, Wiley Blackwell, vol. 36(4), pages 68-93, December.
    22. Ioannis Kostakis, 2017. "The impact of shadow economy and/or corruption on private consumption: further evidence from selected Eurozone economies," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 7(3), pages 411-434, December.
    23. Aziz N. Berdiev & James W. Saunoris & Friedrich Schneider, 2020. "Poverty and the shadow economy: The role of governmental institutions," The World Economy, Wiley Blackwell, vol. 43(4), pages 921-947, April.

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    More about this item

    Keywords

    Shadow economy; Federalism; Decentralization; Corruption; O17; H77; H11; D73;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption

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