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

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  • Roberto Dell’Anno

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  • 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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    Citations

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    Cited by:

    1. Désirée Teobaldelli & Friedrich Schneider, 2013. "The influence of direct democracy on the shadow economy," Public Choice, Springer, vol. 157(3), pages 543-567, December.
    2. repec:bla:jecsur:v:32:y:2018:i:2:p:335-356 is not listed on IDEAS
    3. 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.
    4. 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.
    5. Alessandro Belmonte & Roberto Dell'Anno & Desiree Teobaldelli, 2016. "Tax Morale, Aversion to Ethnic Diversity, and Decentralization," Working Papers 07/2016, IMT Institute for Advanced Studies Lucca, revised Dec 2016.
    6. repec:eee:reveco:v:55:y:2018:i:c:p:1-20 is not listed on IDEAS
    7. repec:elg:eechap:17640_12 is not listed on IDEAS
    8. 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.
    9. 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.
    10. Rajeev K. Goel & James W. Saunoris, 2017. "Forms of government decentralization and institutional quality: evidence from a large sample of nations," Chapters,in: Central and Local Government Relations in Asia, chapter 12, pages 395-420 Edward Elgar Publishing.
    11. repec:spr:eurase:v:7:y:2017:i:3:d:10.1007_s40822-017-0072-2 is not listed on IDEAS

    More about this item

    Keywords

    Shadow economy; Federalism; Decentralization; Corruption; O17; H77; H11; D73;

    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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