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Shadow Economy, Rent-Seeking Activities and the Perils of Reinforcement of the Rule of Law

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  • Ekaterina VOSTROKNUTOVA

Abstract

An economy is considered where a possibility to seek rents (a particular case of this activity is corruption) exists along with production. A producer is able to hide part of his output from both bribery and taxation. It is shown that the presence of a shadow sector has different effects in economies with hight and low rent-seeking. As expected, in the economy with low corruption the direct law enforcement is beneficial for growth, and reduces the shadow setor. However, in the highly corrupt economy, combating the shadow economy reduces output and increases corruption, while combating corruption reduces the shadow economy.

Suggested Citation

  • Ekaterina VOSTROKNUTOVA, 2003. "Shadow Economy, Rent-Seeking Activities and the Perils of Reinforcement of the Rule of Law," Economics Working Papers ECO2003/09, European University Institute.
  • Handle: RePEc:eui:euiwps:eco2003/09
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    References listed on IDEAS

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    1. Christopher J. Waller & Thierry Verdier & Roy Gardner, 2002. "Corruption: Top Down or Bottom Up?," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 688-703, October.
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    6. Murphy, Kevin M & Shleifer, Andrei & Vishny, Robert W, 1993. "Why Is Rent-Seeking So Costly to Growth?," American Economic Review, American Economic Association, vol. 83(2), pages 409-414, May.
    7. Frye, Timothy & Shleifer, Andrei, 1997. "The Invisible Hand and the Grabbing Hand," American Economic Review, American Economic Association, vol. 87(2), pages 354-358, May.
    8. Tito Boeri & Pietro Garibaldi, "undated". "Shadow Activity and Unemployment in a Depressed Labor Market," Working Papers 177, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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    12. Garoupa, Nuno, 1997. " The Theory of Optimal Law Enforcement," Journal of Economic Surveys, Wiley Blackwell, vol. 11(3), pages 267-295, September.
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    Cited by:

    1. Clara Delavallade, 2012. "What Drives Corruption? Evidence from North African Firms," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 21(4), pages 499-547, August.
    2. repec:hal:journl:halshs-00143412 is not listed on IDEAS
    3. Maxim Bouev, 2005. "State Regulations, Job Search and Wage Bargaining: A Study in the Economics of the Informal Sector," William Davidson Institute Working Papers Series wp764, William Davidson Institute at the University of Michigan.

    More about this item

    Keywords

    corruption; rent-seeking; shadow economy; law enforcement; transition;

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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