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Corruption, Centralization, and the Shadow Economy

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  • Luciana Echazu
  • Pinaki Bose

Abstract

In their pioneering work on corruption, Shleifer and Vishny (1993) find that a centralized bureaucracy results in lower bribes. Our paper extends the analysis to economies with formal and informal sectors. When corrupt officials operate in both sectors, bureaucratic centralization is beneficial when confined to the formal sector; however, we show that cross‐sector centralization can result in higher bribes and lower welfare. Furthermore, contrary to Choi and Thum (2005), we demonstrate that, depending on the organization of the bureaucracy and the productivity of the informal sector, the presence of the shadow economy may have adverse effects on corruption and welfare.

Suggested Citation

  • Luciana Echazu & Pinaki Bose, 2008. "Corruption, Centralization, and the Shadow Economy," Southern Economic Journal, John Wiley & Sons, vol. 75(2), pages 524-537, August.
    • Handle: RePEc:wly:soecon:v:75:y:2008:i:2:p:524-537
    DOI: 10.1002/j.2325-8012.2008.tb00917.x
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    References listed on IDEAS

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    2. Christopher J. Waller & Thierry Verdier & Roy Gardner, 2002. "Corruption: Top Down or Bottom Up?," Economic Inquiry, Western Economic Association International, vol. 40(4), pages 688-703, October.
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    8. Jay Pil Choi & Marcel Thum, 2005. "Corruption And The Shadow Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 46(3), pages 817-836, August.
    9. Zoido-Lobatón, Pablo & Johnson, Simon & Kaufmann, Daniel, 1998. "Corruption, public finances and the unofficial economy," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34372, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
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