Corruption and the shadow economy

Jay Pil Choi, Marcel Thum

Research output: Contribution to journalReview article

107 Citations (Scopus)

Abstract

This article develops a simple framework for analyzing the links between corruption and the unofficial economy and their implications for the official economy. In a model of self-selection with heterogeneous entrepreneurs, we show that the entrepreneurs' option to flee to the underground economy constrains a corrupt official's ability to introduce distortions to the economy for private gains. The unofficial economy thus mitigates government-induced distortions and, as a result, leads to enhanced economic activities in the official sector. In this sense, the presence of the unofficial sector acts as a complement to the official economy instead of as a substitute.

Original languageEnglish
Pages (from-to)817-836
Number of pages20
JournalInternational Economic Review
Volume46
Issue number3
DOIs
Publication statusPublished - 2005 Aug

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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