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Accounting for Corruption: Taxes, the Shadow Economy, Endogenous Growth and Inflation

Author

Listed:
  • Max Gillman

    () (Economics Dept. CERGE-EI)

  • Michal Kejak

Abstract

Modelling corruption explicitly in this paper produces changes in the predictions about how taxes affect the size of the "underground", non-market, or shadow, economy. Instead of inducing shifts towards the non-market good as in standard models without explicit corruption, here government tax increases raise the value of the corruption services and increase their use, without tending to cause an increase in the size of the shadow sector. These features conform to evidence on tax rates, corruption, and the size of the shadow economy, making a contribution relative to conventional models. Here a representative agent buys the corruption services and provides labor in the corruption sector. The agent acts within an endogenous growth neoclassical monetary model in which cash-only is used to buy the non-market good, while credit also can be used to buy the market good. An increase in inflation raises the price of the corruption service, reduces the non-market good consumption, and tends to lower the balanced-path growth rate by more than in conventional models. The effect of an increased preference for the non-market good, which is interpreted as in increase in corruption, has an ambiguous effect on the growth rate

Suggested Citation

  • Max Gillman & Michal Kejak, 2006. "Accounting for Corruption: Taxes, the Shadow Economy, Endogenous Growth and Inflation," 2006 Meeting Papers 402, Society for Economic Dynamics.
  • Handle: RePEc:red:sed006:402
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    References listed on IDEAS

    as
    1. Thakor, Anjan V, 1996. " Capital Requirements, Monetary Policy, and Aggregate Bank Lending: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 51(1), pages 279-324, March.
    2. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, pages 893-910.
    3. Bacchetta, Philippe & Caminal, Ramon, 2000. "Do capital market imperfections exacerbate output fluctuations?," European Economic Review, Elsevier, vol. 44(3), pages 449-468, March.
    4. Christopher L. House, 2002. "Adverse Selection and the Accelerator," Macroeconomics 0211015, EconWPA.
    5. James S. Ang & Rebel A. Cole & James Wuh Lin, 2000. "Agency Costs and Ownership Structure," Journal of Finance, American Finance Association, vol. 55(1), pages 81-106, February.
    6. Aghion, Philippe & Saint-Paul, Gilles, 1998. "VIRTUES OF BAD TIMES Interaction Between Productivity Growth and Economic Fluctuations," Macroeconomic Dynamics, Cambridge University Press, vol. 2(03), pages 322-344, September.
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    More about this item

    Keywords

    Corruption; taxes; non-market good; endogenous growth; inflation;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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