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How do institutions affect corruption and the shadow economy?

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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.

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Authors and Affiliations

  1. Georg-August University Göttingen, Platz der Göttinger Sieben 3, 37073, Göttingen, Germany

    Axel Dreher

  2. KOF Swiss Economic Institute, Zurich, Switzerland

    Axel Dreher

  3. CESifo, Munich, Germany

    Axel Dreher

  4. Department of Economics, University of Exeter Business School, Streatham Court, Rennes Drive, Exeter, EX4 4PU, England, UK

    Christos Kotsogiannis & Steve McCorriston

Authors
  1. Axel Dreher
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  2. Christos Kotsogiannis
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  3. Steve McCorriston
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Correspondence to Christos Kotsogiannis.

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Dreher, A., Kotsogiannis, C. & McCorriston, S. How do institutions affect corruption and the shadow economy?. Int Tax Public Finance 16, 773–796 (2009). https://doi.org/10.1007/s10797-008-9089-5

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  • DOI: https://doi.org/10.1007/s10797-008-9089-5

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