Shadow Economy and Corruption

Rosella Levaggi, Francesco Menoncin () and Andrea Modena ()
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Francesco Menoncin: University of Brescia
Andrea Modena: Department of Economics

A chapter in New Perspectives in the Public and Cultural Sectors, 2025, pp 311-330 from Springer

Abstract: Abstract We study the endogenous relationship between the shadow economy and corruption in a dynamic model in which utility-maximizing entrepreneurs allocate their assets between legal and illegal activities and pay bribes to reduce the probability of being audited and fined. In this setting, we show that corruption generates additional economic uncertainty, potentially distorting the results of government audit policies and leading to undesirable outcomes. Higher auditing fines make the shadow economy less profitable, curbing corruption incentives. Conversely, more frequent audits can inflate the shadow economy by making corruption more profitable. The vulnerability of the tax system to illegal behaviours does not affect these patterns significantly, suggesting that fiscal parameters play a more critical role in fighting corruption.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:conchp:978-3-031-81892-9_18

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DOI: 10.1007/978-3-031-81892-9_18

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