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How Do Institutions Affect Corruption and the Shadow Economy

  • 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)

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).

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Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 0505.

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Date of creation: Feb 2005
Date of revision:
Handle: RePEc:exe:wpaper:0505
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