Corruption and the Shadow Economy
27 Pages Posted: 30 Jan 2002
Date Written: January 2002
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
JEL Classification: D9, H2, K4, L1
Suggested Citation: Suggested Citation
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