How Do Institutions Affect Corruption and the Shadow Economy

Axel Dreher, Christos Kotsogiannis and Steve McCorriston
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Steve McCorriston: Department of Economics, University of Exeter

No 505, Discussion Papers from University of Exeter, Department of Economics

Abstract: This paper analyzes a simple model that captures the relationship between institutional quality, the shadow economy and corruption. It shows that an improvement in institutional quality reduces the shadow economy and a?ects the corruption market. The exact relationship between corruption and institutional quality is, however, ambiguous and depends on the relative e?ectiveness of the institutional quality in the shadow and corruption markets. The predictions of the model are empirically tested—by means of Structural Equation Modelling that treats the shadow economy and the corruption market as latent variables—using data from OECD countries. The results show that an improvement in institutional quality reduces the shadow economy directly and corruption both directly and indirectly (through its e?ect on the shadow market).

Keywords: Corruption; Shadow Economies; OECD countries; Latent Variables; Structural Equation Modelling. (search for similar items in EconPapers)
JEL-codes: C39 H10 K49 O1 (search for similar items in EconPapers)
Date: 2005-02
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Citations: View citations in EconPapers (31)

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https://exetereconomics.github.io/RePEc/dpapers/DP0505.pdf (application/pdf)

Related works:
Journal Article: How do institutions affect corruption and the shadow economy? (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:exe:wpaper:0505

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