Home Subscribe Login Contact Us Search Journal Articles PFM RSS Feed

PFM Articles Search Journal Articles

Fiscal Decentralization, Corruption, and the Shadow Economy

Author: MICHAEL ALEXEEV and LUBA HABODASZOVA
Published in PFM, Vol. 12 No. 1

We analyze the implications of fiscal decentralization for the size of the shadow economy, local government corruption, and the provision productivity enhancing local public goods. Most important, we show that an increase in the share of locally raised tax revenue left with the local government brings more entrepreneurs from the shadow and into the official econo-my. In addition, corruption, measured by the size of bribes that local government imposes on entrepreneurs for letting them use official public goods fully, may increase or decrease, de-pending on the extent to which public goods enhance the entrepreneur’s productivity. We test the model’s implication with respect to the size of shadow economy using cross-sectional country-level data and find strong support for our results.

Subscribers: Login to read this article

Guests: Subscribe to PFM, or purchase individual article access for $10.
The article is not available for automatic download. We will email the article to you as a PDF file upon receiving your payment, typically within 24 hours.