Corruption and the Shadow Economy

No 633, CESifo Working Paper Series from CESifo

Abstract: This paper develops a simple framework to analyze the links between corruption and the unofficial economy and their implications for the official economy. In a model of self-selection with heterogeneous entrepreneurs, we show that the entrepreneurs’ option to flee to the underground economy constrains a corrupt official’s ability to introduce distortions to the economy for private gains. The unofficial economy thus mitigates government-induced distortions and, as a result, leads to enhanced economic activities in the official sector. In this sense, the presence of the unofficial sector acts as a complement to the official economy rather than a substitute.

Keywords: corruption; shadow economy; official economy; self-selection. (search for similar items in EconPapers)
Date: 2002
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Citations: View citations in EconPapers (24)

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Related works:
Journal Article: CORRUPTION AND THE SHADOW ECONOMY (2005)
Working Paper: Corruption and the shadow economy (2003)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_633

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