Corruption with Heterogeneous Enforcement Agents in the Shadow Economy

Pinaki Bose and Luciana Echazu ()

Journal of Institutional and Theoretical Economics (JITE), 2007, vol. 163, issue 2, 285-296

Abstract: We analyze the relationship between the underground (or shadow) economy and the formal or legal sector in the presence of corruption in both sectors. Firms choose between operating in the legal and in the underground economy. With morally heterogeneous law enforcement agents monitoring the underground economy, the equilibrium in both sectors depends critically on the incentives of honest enforcers and on the proportion of such agents. In particular, we show that an increase in the proportion of honest agents monitoring the shadow economy may have the adverse effect of increasing its size, together with concomitant increases in negative externalities.

JEL-codes: D73 K42 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (6)

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