Decentralization, Corruption, and the Unofficial Economy

Michael Alexeev and Luba Habodaszova ()
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Luba Habodaszova: City University/VSM, Bratislava, Slovakia

No 2007-008, CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: We analyze the implications of decentralization for the incentives of local governments to provide productivity enhancing local public goods and extort bribes from local entrepreneurs. We show that an increase in the share of locally raised tax revenue left with the local government raises its incentives to provide public goods and brings more entrepreneurs into the official economy. Corruption, measured by the size of bribes that local officials charge entrepreneurs for issuing licenses for operating officially, may increase or decrease, depending on the extent to which public goods enhance the entrepreneur’s productivity. The tests using cross-sectional country-level data support the model’s implications.

Keywords: decentralization; local public goods; corruption; unofficial economy (search for similar items in EconPapers)
JEL-codes: D73 H77 O17 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2007-05
New Economics Papers: this item is included in nep-dev, nep-ent, nep-pbe, nep-reg and nep-ure
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Citations: View citations in EconPapers (6)

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