Skip to main content

Advertisement

SpringerLink
Log in

Corruption and the shadow economy: like oil and vinegar, like water and fire?

  • Published:
International Tax and Public Finance Aims and scope Submit manuscript

Abstract

From a theoretical point of view, the relationship between corruption and the shadow economy is ambiguous: They can either be substitutes or complements. This paper contributes to this debate by using a structural equation model with two latent variables to extract information on various dimensions of corruption and the shadow economy. Analyzing a sample of 51 countries around the world over the period 2000 to 2005, we present empirical evidence for a complementary (positive) relationship of corruption and the shadow economy.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Adam, M. C., & Ginsburgh, V. (1985). The effects of irregular markets on macroeconomic policy: some estimates for Belgium. European Economic Review, 29(1), 15–33.

    Article  Google Scholar 

  • Bajada, Ch., & Schneider, F. (2005). The shadow economies of the Asia–pacific. Pacific Economic Review, 10(3), 379–401.

    Article  Google Scholar 

  • Bardan, P. (1997). Corruption and development: a review of issues. Journal of Economic Literature, 35(3), 1320–1346.

    Google Scholar 

  • Bollen, K. A. (1989). Structural equations with latent variables. New York: Wiley.

    Google Scholar 

  • Browne, M. W., & Cudeck, R. (1993). Alternative ways of assessing model fit. In K. A. Bollen & J. S. Long (Eds.), Testing structural equation models (pp. 445–455). Newbury Park: Sage.

    Google Scholar 

  • Choi, J. P., & Thum, M. (2005). Corruption and the shadow economy. International Economic Review, 46(3), 817–836.

    Article  Google Scholar 

  • Dell’Anno, R., & Schneider, F. (2003). The shadow economy of Italy and other OECD countries: what do we know? Journal of Public Finance and Public Choice, 21(2–3), 97–120.

    Google Scholar 

  • Dell’Anno, R. (2007). The shadow economy in Portugal: an analysis with the MIMIC approach. Journal of Applied Economics, 10(2), 253–277.

    Google Scholar 

  • Dreher, A., & Schneider, F. (2010). Corruption and the shadow economy: an empirical analysis. Public Choice, 144, 215–238.

    Article  Google Scholar 

  • Dreher, A., Kotsogiannis, Ch., & McCorriston, S. (2009). How do institutions affect corruption and the shadow economy? International Tax and Public Finance, 16, 773–796.

    Article  Google Scholar 

  • Dreher, A., Kosogiannis, Ch., & McCorriston, S. (2007). Corruption around the world: evidence from a structural model. Journal of Comparative Economics, 35(3), 443–446.

    Article  Google Scholar 

  • Easterly, W., & Levine, R. (1997). Africa’s growth tragedy: policies and ethnic divisions. The Quarterly Journal of Economics, 112(4), 1203–1250.

    Article  Google Scholar 

  • Friedman, E., Johnson, S., Kaufmann, D., & Zoido-Lobatón, P. (2000). Dodging the grabbing hand: the determinants of unofficial activity in 69 countries. Journal of Public Economics, 76(3), 459–493.

    Article  Google Scholar 

  • Giles, D. E. A. (1998). The underground economy: minimizing the size of government. Econometrics working paper 9801, University of Victoria.

  • Giles, D., Lindsay, E. A., Tedds, M., & Werkneh, G. (2002). The Canadian underground and measured economies. Applied Economics, 34(4), 2347–2352.

    Article  Google Scholar 

  • Goel, R. K., & Nelson, M. A. (2005). Economic versus political freedom: cross-country influences on corruption. Australian Economic Papers, 44(2), 121–133.

    Article  Google Scholar 

  • Gwartney, J., Lawson, R., & Norton, S. (2008). Economic freedom of the world: 2008 annual report. The Fraser Institute, Data retrieved from www.freetheworld.com.

  • Hibbs, D. A. Jr., & Piculescu, V. (2005). Institutions, corruption and tax evasion in the unofficial economy. Discussion paper, Göteburg University.

  • Hindriks, J., Muthoo, A., & Keen, M. (1999). Corruption, extortion and evasion. Journal of Public Economics, 74(3), 395–430.

    Article  Google Scholar 

  • Johnson, S., Kaufmann, D., & Shleifer, A. (1997). The unofficial economy in transition. Brookings Paper on Economic Activity, 2.

  • Johnson, S., Kaufmann, D., & Zoido-Lobatón, P. (1998a). Regulatory discretion and the unofficial economy. The American Economic Review, 88(2), 387–392.

    Google Scholar 

  • Johnson, S., Kaufmann, D., & Zoido-Lobatón, P. (1998b). Corruption, public finances and the unofficial economy. Discussion paper, The World Bank.

  • Johnson, S., Kaufmann, D., McMillan, J., & Woodruff, C. (2000). Why do firms hide? Bribes and unofficial activity after communism. Journal of Public Economics, 76, 495–520.

    Article  Google Scholar 

  • Kaufmann, D., Kraay, A., & Mastruzzi, M. (2007). Governance matters VI: governance indicators for 1996–2006. World Bank policy research working paper WPS 4280.

  • Lippert, O., & Walker, M. (Eds.) (1997). The underground economy: global evidences of its size and impact. The Frazer Institute: Vancouver.

    Google Scholar 

  • Loayza, N. V. (1996). The economics of the informal sector: a simple model and some empirical evidence from Latin America. Carnegie-Rochester Conference Series on Public Policy, 45, 129–162.

    Article  Google Scholar 

  • Mauro, P. (1995). Corruption and growth. The Quarterly Journal of Economics, 110(3), 681–712.

    Article  Google Scholar 

  • Mauro, P. (1998). Corruption and the composition of government expenditure. Journal of Public Economics, 69(2), 263–279.

    Article  Google Scholar 

  • Miller, T., Holmes, K. R., Kim, A. B., Markheim, D., Roberts, J. M., & Walsh, C. (2008). 2008 index of economic freedom, Washington, DC.

  • Mulaik, S. A., James, L. R., Van Alstine, J., Bennett, N., Lind, S., & Stilwell, C. D. (1989). Evaluation of goodness-of-fit indices for structural equation models. Psychological Bulletin, 105, 430–445.

    Article  Google Scholar 

  • Neck, R., Hofreither, M., & Schneider, F. (1989). The consequences of progressive income taxation for the shadow economy: some theoretical considerations. In D. Boes & B. Felderer (Eds.), The political economy of progressive taxation (pp. 149–176). Berlin: Springer.

    Chapter  Google Scholar 

  • North, D. (1990). Institutions, institutional changes and economic performance. Cambridge: Cambridge University Press.

    Google Scholar 

  • Paldam, M. (2003). The cross-country pattern of corruption: economics, culture and the seesaw dynamics. European Journal of Political Economy, 18(2), 215–240.

    Article  Google Scholar 

  • Pasuk, P., & Sungsidh, P. (1999). Corruption and democracy in Thailand. Bangkok: Silkworm Books.

    Google Scholar 

  • Rose-Ackerman, S. (1999). Corruption and government. Cambridge: Cambridge University Press.

    Google Scholar 

  • Schneider, F. (1986). Estimating the size of the Danish shadow economy using the currency demand approach: an attempt. The Scandinavian Journal of Economics, 88(4), 643–668.

    Article  Google Scholar 

  • Schneider, F. (1997). The shadow economies of Western Europe. Economic Affairs, 17(3), 42–48.

    Article  Google Scholar 

  • Schneider, F. (2004). The shadow economy. In Ch. K. Rowley & F. Schneider (Eds.), Encyclopedia of public choice (pp. 286–295). Dordrecht: Kluwer Academic.

    Google Scholar 

  • Schneider, F. (2005). Shadow economies around the world: what do we really know? European Journal of Political Economy, 21(3), 598–642.

    Article  Google Scholar 

  • Schneider, F. (2006). Shadow economies and corruption all over the world: what do we really know? CESifo working paper No. 1806.

  • Schneider, F., & Enste, D. (2000). Shadow economies: size, causes, and consequences. The Journal of Economic Literature, 38(1), 77–114.

    Article  Google Scholar 

  • Schneider, F., Buehn, A., & Montenegro, C. E. (2010). New estimates for the shadow economies all over the world. International Economic Journal, 24, 443–461.

    Article  Google Scholar 

  • Seldadyo, H., & de Haan, J. (2005). The determinants of corruption: a reinvestigation. Paper presented at the 2005 annual meeting of the European public choice society, March 31–April 3, Durham, England.

  • Shleifer, A. (1997). Joseph Schumpeter lecture. Government in transition. European Economic Review, 41, 385–410.

    Article  Google Scholar 

  • Shleifer, A., & Vishny, R. W. (1993). Corruption. The Quarterly Journal of Economics, 108(3), 599–618.

    Article  Google Scholar 

  • Smith, P. (1994). Assessing the size of the underground economy: the Canadian statistical perspectives. Canadian Economic Observer, Cat. No. 11-010, 3.16-33, at 3.18.

  • Tanzi, V. (1998). Corruption around the world: causes, consequences, scope and cures. IMF Staff Papers, 45(4), 559–594.

    Article  Google Scholar 

  • Tanzi, V. (1999). Uses and abuses of estimates of the underground economy. The Economic Journal, 109(456), 338–340.

    Article  Google Scholar 

  • Transparency International (2009). http://www.transparency.org/news_room/faq/corruption_faq. Accessed 9 January 2009.

  • Treisman, D. (2000). The causes of corruption: a cross-national study. Journal of Public Economics, 76(3), 399–457.

    Article  Google Scholar 

  • Thomas, J. J. (1992). Informal economic activity. London: Harvester Wheatsheaf.

    Google Scholar 

  • Van Rijckeghem, C., & Weder, B. (2001). Bureaucratic corruption and the rate of temptation: do wages in the civil service affect corruption and by how much? Journal of Development Economics, 65(2), 307–331.

    Article  Google Scholar 

  • World Bank (2008). World development indicators. CD-Rom, Washington DC.

  • World Bank (2009). Anticorruption. http://go.worldbank.org/K6AEEPROC0. Accessed 24 March 2009.

Download references

Author information

Authors and Affiliations

  1. Utrecht School of Economics, Utrecht University, 3512 BL, Utrecht, The Netherlands

    Andreas Buehn

  2. Andrew Young School of Policy Studies, Georgia State University, Atlanta, GA, 30303, USA

    Andreas Buehn

  3. Department of Economics, Johannes Kepler University of Linz, 4040, Linz-Auhof, Austria

    Friedrich Schneider

Authors
  1. Andreas Buehn
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Friedrich Schneider
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Andreas Buehn.

Additional information

Paper presented at the 66th Annual Congress of the International Institute of Public Finance, Uppsala, Sweden, 23–26 August 2010, revised version.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Buehn, A., Schneider, F. Corruption and the shadow economy: like oil and vinegar, like water and fire?. Int Tax Public Finance 19, 172–194 (2012). https://doi.org/10.1007/s10797-011-9175-y

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10797-011-9175-y

Keywords

JEL Classification

Search

Navigation