Keeping both Corruption and the Shadow Economy in Check: The Role of Decentralization

Roberto Dell'Anno and Désirée Teobaldelli

No 1213, Working Papers from University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini

Abstract: This paper puts forward a framework for evaluating the effects of governmental decentralization on the shadow economy and corruption. The theoretical analysis demonstrates that decentralization exerts both a direct and an indirect impact on the shadow economy and corruption. Firstly, decentralization helps to mitigate government-induced distortions, thus limiting the extent of corruption and the informal sector in a direct way. Secondly, in more decentralized systems, individuals have the option to avoid corruption by moving to other jurisdictions, rather than going underground. This limits the impact of corruption on the shadow economy and implies that decentralization is also beneficial in an indirect way. As a result, our analysis documents a positive relationship between corruption and the shadow economy; however, this link proves to be lower in decentralized countries. To test these predictions, we developed an empirical analysis based on a cross-country database of 145 countries that includes different indexes of decentralization, corruption and shadow economy. The empirical evidence is consistent with the theory. Results are robust and significant even after controlling for the endogeneity bias.

Keywords: Shadow economy; Federalism; Decentralization; Corruption. (search for similar items in EconPapers)
JEL-codes: D73 H11 H77 O17 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2012, Revised 2012
New Economics Papers: this item is included in nep-dev, nep-iue and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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http://www.econ.uniurb.it/RePEc/urb/wpaper/WP_12_13.pdf First version, 2012 (application/pdf)

Related works:
Journal Article: Keeping both corruption and the shadow economy in check: the role of decentralization (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:urb:wpaper:12_13

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