Decentralization and the Shadow Economy: Oates Meets Allingham-Sandmo

Andreas Bühn, Christian Lessmann and Gunther Markwardt
Authors registered in the RePEc Author Service: Andreas Buehn

No 3551, CESifo Working Paper Series from CESifo

Abstract: This paper studies the impact of decentralization on the shadow economy. We argue that decentralization may decrease the size of the shadow economy mainly through two transmission channels: (1) Decentralization enhancing public sector efficiency (efficiency effect), and (2) decentralization reducing the distance between bureaucrats and economic agents, which increases the probability of detection of shadow economic activities (deterrence effect). Using various measures of fiscal, political and government employment decentralization in a cross-section of countries, we find the deterrence effect to be of more importance. The deterrence effect is stronger, the lower the degree of institutional quality. Remarkably, we find no robust evidence of the efficiency effect.

Keywords: decentralization; shadow economy (search for similar items in EconPapers)
JEL-codes: D78 H77 O17 (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: Decentralization and the shadow economy: Oates meets Allingham--Sandmo (2013)
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