Why Do Firms Hide? Bribes and Unofficial Activity after Communism

Simon Johnson, Daniel Kaufmann, John McMillan and Christopher Woodruff

Chapter 10 in The Economics of Transition, 2007, pp 335-359 from Palgrave Macmillan

Abstract: Abstract A substantial part of output in many developing and post-communist transition economies goes unreported. This ‘unofficial economy’ impedes economic growth in various ways. First, firms operating underground cannot make use of marketsupporting institutions like the courts and so may invest too little, as de Soto (1989) argues occurs in Peru. Second, doing business in secret generates distortions because of the effort needed to avoid detection and punishment. Resources that are hidden may not find their highest-value uses, as Shleifer and Vishny (1993) suggest happens in Africa. Third, under-reporting costs the government tax revenue that it might otherwise have put to worthwhile use. According to the Latin American evidence of Loayza (1996), a smaller underground sector is associated with higher tax collections, which pay for better public infrastructure and thus lead to faster economic growth.

Date: 2007
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Working Paper: Why Do Firms Hide? Bribes and Unofficial Activity after Communism (2003)
Journal Article: Why do firms hide? Bribes and unofficial activity after communism (2000)
Working Paper: Why do Firms Hide? Bribes and Unofficial Activity After Communism (1999)
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DOI: 10.1057/978-1-349-74092-5_10

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