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Decentralization, Corruption, and the Unofficial Economy

  • Michael Alexeev

    ()

    (Indiana University Bloomington)

  • Luba Habodaszova

    ()

    (City University/VSM, Bratislava, Slovakia)

We analyze the implications of decentralization for the incentives of local governments to provide productivity enhancing local public goods and extort bribes from local entrepreneurs. We show that an increase in the share of locally raised tax revenue left with the local government raises its incentives to provide public goods and brings more entrepreneurs into the official economy. Corruption, measured by the size of bribes that local officials charge entrepreneurs for issuing licenses for operating officially, may increase or decrease, depending on the extent to which public goods enhance the entrepreneur’s productivity. The tests using cross-sectional country-level data support the model’s implications.

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File URL: http://www.iub.edu/~caepr/RePEc/PDF/2007/CAEPR2007-008.pdf
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Paper provided by Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington in its series Caepr Working Papers with number 2007-008.

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Length: 37 pages
Date of creation: May 2007
Date of revision:
Handle: RePEc:inu:caeprp:2007008
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