International Tax and Public Finance

, 16:773

How do institutions affect corruption and the shadow economy?

Authors

  • Axel Dreher
    • KOF Swiss Economic Institute
    • CESifo
    • Georg-August University Göttingen
    • Department of EconomicsUniversity of Exeter Business School
  • Steve McCorriston
    • Department of EconomicsUniversity of Exeter Business School
Article

DOI: 10.1007/s10797-008-9089-5

Cite this article as:
Dreher, A., Kotsogiannis, C. & McCorriston, S. Int Tax Public Finance (2009) 16: 773. doi:10.1007/s10797-008-9089-5

Abstract

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 affects the corruption market. The exact relationship between corruption and institutional quality is, however, ambiguous and depends on the relative effectiveness of institutional quality in the shadow and corruption markets. The analytics also show that the shadow economy and corruption are substitutes. The predictions of the model are empirically tested and confirmed.

Keywords

CorruptionShadow economiesInstitutional quality

JEL Classification

H39C31K49
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Copyright information

© Springer Science+Business Media, LLC 2008