Premium
CORRUPTION AND THE SHADOW ECONOMY*
Author(s) -
Choi Jay Pil,
Thum Marcel
Publication year - 2005
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/j.1468-2354.2005.00347.x
Subject(s) - shadow (psychology) , language change , government (linguistics) , business sector , economy , information economy , post industrial economy , economics , private sector , complement (music) , market economy , economic system , business , economic growth , psychology , art , linguistics , philosophy , biochemistry , literature , chemistry , complementation , psychotherapist , gene , phenotype
This article develops a simple framework for analyzing the links between corruption and the unofficial economy and their implications for the official economy. In a model of self‐selection with heterogeneous entrepreneurs, we show that the entrepreneurs' option to flee to the underground economy constrains a corrupt official's ability to introduce distortions to the economy for private gains. The unofficial economy thus mitigates government‐induced distortions and, as a result, leads to enhanced economic activities in the official sector. In this sense, the presence of the unofficial sector acts as a complement to the official economy instead of as a substitute.