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Corruption and the Shadow Economy: An Empirical Analysis

Author

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  • Dreher, Axel

    (Heidelberg University)

  • Schneider, Friedrich

    (University of Linz)

Abstract

This paper analyzes the influence of the shadow economy on corruption and vice versa. We hypothesize that corruption and shadow economy are substitutes in high income countries while they are complements in low income countries. The hypotheses are tested for a cross-section of 120 countries and a panel of 70 countries for the period 1994-2002. Our results show that the shadow economy reduces corruption in high income countries, but increases corruption in low income countries. We also find that stricter regulations increase both corruption and the shadow economy.

Suggested Citation

  • Dreher, Axel & Schneider, Friedrich, 2006. "Corruption and the Shadow Economy: An Empirical Analysis," IZA Discussion Papers 1936, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp1936
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    regulation; shadow economy; corruption; tax burden;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O5 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies

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