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Corruption with Heterogeneous Enforcement Agents in the Shadow Economy

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  • Pinaki Bose
  • Luciana Echazu

Abstract

We analyze the relationship between the underground (or shadow) economy and the formal or legal sector in the presence of corruption in both sectors. Firms choose between operating in the legal and in the underground economy. With morally heterogeneous law enforcement agents monitoring the underground economy, the equilibrium in both sectors depends critically on the incentives of honest enforcers and on the proportion of such agents. In particular, we show that an increase in the proportion of honest agents monitoring the shadow economy may have the adverse effect of increasing its size, together with concomitant increases in negative externalities.

Suggested Citation

  • Pinaki Bose & Luciana Echazu, 2007. "Corruption with Heterogeneous Enforcement Agents in the Shadow Economy," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(2), pages 285-296, June.
  • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200706)163:2_285:cwheai_2.0.tx_2-1
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    References listed on IDEAS

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    1. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1320-1346, September.
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    Cited by:

    1. Mishra, Ajit & Ray, Ranjan, 2010. "Informality, Corruption, and Inequality," Department of Economics Working Papers 22127, University of Bath, Department of Economics.
    2. Bouwe R. Dijkstra, 2011. "Good and Bad Equilibria with the Informal Sector," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(4), pages 668-685, December.

    More about this item

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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