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Decentralization and the Shadow Economy: Oates Meets Allingham-Sandmo

  • Andreas Bühn
  • Christian Lessmann
  • Gunther Markwardt

This paper studies the impact of decentralization on the shadow economy. We argue that decentralization may decrease the size of the shadow economy mainly through two transmission channels: (1) Decentralization enhancing public sector efficiency (efficiency effect), and (2) decentralization reducing the distance between bureaucrats and economic agents, which increases the probability of detection of shadow economic activities (deterrence effect). Using various measures of fiscal, political and government employment decentralization in a cross-section of countries, we find the deterrence effect to be of more importance. The deterrence effect is stronger, the lower the degree of institutional quality. Remarkably, we find no robust evidence of the efficiency effect.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-08/cesifo1_wp3551.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3551.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3551
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  1. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  2. Friedrich Schneider, 2004. "Shadow Economies around the World: What do we really know?," IAW Discussion Papers 16, Institut für Angewandte Wirtschaftsforschung (IAW).
  3. Schneider, Friedrich G., 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, pages 1-66.
  4. Axel Dreher & Friedrich Schneider, 2006. "Corruption and the Shadow Economy: An Empirical Analysis," CESifo Working Paper Series 1653, CESifo Group Munich.
  5. Klovland, Jan Tore, 1984. " Tax Evasion and the Demand for Currency in Norway and Sweden. Is There a Hidden Relationship?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 86(4), pages 423-39.
  6. Gary S. Becker, 1974. "Crime and Punishment: An Economic Approach," NBER Chapters, in: Essays in the Economics of Crime and Punishment, pages 1-54 National Bureau of Economic Research, Inc.
  7. Benno Torgler & Friedrich Schneider & Christoph Schaltegger, 2010. "Local autonomy, tax morale, and the shadow economy," Public Choice, Springer, vol. 144(1), pages 293-321, July.
  8. Michael Alexeev & Luba Habodaszova, 2007. "Decentralization, Corruption, and the Unofficial Economy," Caepr Working Papers 2007-008, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  9. Kaufmann, Daniel & Kraay, Aart & Mastruzzi, Massimo, 2008. "Governance matters VII : aggregate and individual governance indicators 1996-2007," Policy Research Working Paper Series 4654, The World Bank.
  10. Andrei Shleifer & Robert W. Vishny, 1998. "The Quality of Government," Harvard Institute of Economic Research Working Papers 1847, Harvard - Institute of Economic Research.
  11. Thushyanthan Baskaran & Lars P. Feld, 2009. "Fiscal Decentralization and Economic Growth in OECD Countries: Is there a Relationship?," CESifo Working Paper Series 2721, CESifo Group Munich.
  12. Lars P. Feld & Friedrich Schneider, 2010. "Survey on the Shadow Economy and Undeclared Earnings in OECD Countries," German Economic Review, Verein für Socialpolitik, vol. 11, pages 109-149, 05.
  13. David E. A. Giles, 1999. "Modelling the Hidden Economy and the Tax-Gap in New Zealand," Econometrics Working Papers 9905, Department of Economics, University of Victoria.
  14. G. Gulsun Arikan, 2004. "Fiscal Decentralization: A Remedy for Corruption?," International Tax and Public Finance, Springer, vol. 11(2), pages 175-195, 03.
  15. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  16. Frey, Bruno S & Pommerehne, Werner W, 1984. "The Hidden Economy: State and Prospects for Measurement," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 30(1), pages 1-23, March.
  17. Oates, Wallace E., 1993. "Fiscal Decentralization and Economic Development," National Tax Journal, National Tax Association, vol. 46(2), pages 237-43, June.
  18. Klarita G�rxhani, 2004. "The Informal Sector in Developed and Less Developed Countries: A Literature Survey," Public Choice, Springer, vol. 120(3_4), pages 267-300, 09.
  19. Fan, C. Simon & Lin, Chen & Treisman, Daniel, 2009. "Political decentralization and corruption: Evidence from around the world," Journal of Public Economics, Elsevier, vol. 93(1-2), pages 14-34, February.
  20. Désirée Teobaldelli, 2011. "Federalism and the shadow economy," Public Choice, Springer, vol. 146(3), pages 269-289, March.
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