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How Do Institutions Affect Corruption and the Shadow Economy

Author

Listed:
  • Axel Dreher

    (Thurgau Institute of Economics, Switzerland and University of Konstanz, Department of Economics)

  • Christos Kotsogiannis

    (Department of Economics, University of Exeter)

  • Steve McCorriston

    (Department of Economics, University of Exeter)

Abstract

This paper analyzes a simple model that captures the relationship between institutional quality, the shadow economy and corruption. It shows that an improvement in institutional quality reduces the shadow economy and a?ects the corruption market. The exact relationship between corruption and institutional quality is, however, ambiguous and depends on the relative e?ectiveness of the institutional quality in the shadow and corruption markets. The predictions of the model are empirically tested—by means of Structural Equation Modelling that treats the shadow economy and the corruption market as latent variables—using data from OECD countries. The results show that an improvement in institutional quality reduces the shadow economy directly and corruption both directly and indirectly (through its e?ect on the shadow market).

Suggested Citation

  • Axel Dreher & Christos Kotsogiannis & Steve McCorriston, 2005. "How Do Institutions Affect Corruption and the Shadow Economy," Discussion Papers 0505, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:0505
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    Keywords

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    JEL classification:

    • H10 - Public Economics - - Structure and Scope of Government - - - General
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • K49 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Other
    • C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other

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