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Corruption with Heterogeneous Enforcement Agents in the Shadow Economy

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  • Pinaki Bose
  • Luciana Echazu

Abstract

We analyze the relationship between the underground (or shadow) economy and the formal or legal sector in the presence of corruption in both sectors. Firms choose between operating in the legal and in the underground economy. With morally heterogeneous law enforcement agents monitoring the underground economy, the equilibrium in both sectors depends critically on the incentives of honest enforcers and on the proportion of such agents. In particular, we show that an increase in the proportion of honest agents monitoring the shadow economy may have the adverse effect of increasing its size, together with concomitant increases in negative externalities.

Suggested Citation

  • Pinaki Bose & Luciana Echazu, 2007. "Corruption with Heterogeneous Enforcement Agents in the Shadow Economy," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 163(2), pages 285-296, June.
    • Handle: RePEc:mhr:jinste:urn:sici:0932-4569(200706)163:2_285:cwheai_2.0.tx_2-1
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    References listed on IDEAS

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    1. Arnott, Richard J. & Greenwald, Bruce & Kanbur, Ravi & Nalebuff, Barry, 2003. "Joseph Stiglitz and Economics for an Imperfect World," Working Papers 127202, Cornell University, Department of Applied Economics and Management.
    2. Pranab Bardhan, 1997. "Corruption and Development: A Review of Issues," Journal of Economic Literature, American Economic Association, vol. 35(3), pages 1320-1346, September.
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    Cited by:

    1. Larissa Batrancea & Anca Nichita & Ioan Batrancea & Lucian Gaban, 2018. "The Strenght of the Relationship Between Shadow Economy and Corruption: Evidence from a Worldwide Country-Sample," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 138(3), pages 1119-1143, August.
    2. Bouwe R. Dijkstra, 2011. "Good and Bad Equilibria with the Informal Sector," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 167(4), pages 668-685, December.
    3. repec:eid:wpaper:13/10 is not listed on IDEAS
    4. Ajit Mishra & R Ray, 2010. "Informality, Corruption, and Inequality," Department of Economics Working Papers 13/10, University of Bath, Department of Economics.
    5. Paraskevi Koufopoulou & Colin C. Williams & Athanassios Vozikis & Kyriakos Souliotis, 2019. "Shadow Economy: Definitions, terms & theoretical considerations," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 9(5), pages 1-3.
    6. Yang Qi & Mingyue Gao & Haoyu Wang & Huijie Ding & Jianxu Liu & Songsak Sriboonchitta, 2023. "Does Marketization Promote High-Quality Agricultural Development in China?," Sustainability, MDPI, vol. 15(12), pages 1-28, June.

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    More about this item

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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