Shadow Economy, Rent-Seeking Activities and the Perils of Reinforcement of the Rule of Law

Ekaterina Vostroknutova

No ECO2003/09, Economics Working Papers from European University Institute

Abstract: An economy is considered where a possibility to seek rents (a particular case of this activity is corruption) exists along with production. A producer is able to hide part of his output from both bribery and taxation. It is shown that the presence of a shadow sector has different effects in economies with hight and low rent-seeking. As expected, in the economy with low corruption the direct law enforcement is beneficial for growth, and reduces the shadow setor. However, in the highly corrupt economy, combating the shadow economy reduces output and increases corruption, while combating corruption reduces the shadow economy.

Keywords: corruption; rent-seeking; shadow economy; law enforcement; transition (search for similar items in EconPapers)
JEL-codes: D72 H26 K42 O17 (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-ent, nep-law and nep-tra
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Citations: View citations in EconPapers (4)

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Working Paper: Shadow Economy, Rent-Seeking Activities and the Perils of Reinforcement of the Rule of Law (2003)
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