International Tax and Public Finance

, Volume 16, Issue 6, pp 773-796

First online:

How do institutions affect corruption and the shadow economy?

  • Axel DreherAffiliated withKOF Swiss Economic InstituteCESifoGeorg-August University Göttingen
  • , Christos KotsogiannisAffiliated withDepartment of Economics, University of Exeter Business School Email author 
  • , Steve McCorristonAffiliated withDepartment of Economics, University of Exeter Business School

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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.


Corruption Shadow economies Institutional quality

JEL Classification

H39 C31 K49