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Title:Decentralizatin and the shadow economy: Oates meets Allingham-Sandmo PDF Logo
Authors:Bühn, Andreas
Lessmann, Christian
Markwardt, Gunther
Issue Date:2011
Series/Report no.:CESifo working paper: Public Finance 3551
Abstract:This paper studies the impact of decentralization on the shadow economy. We argue that decentralization may decrease the size of the shadow economy mainly through two transmission channels: (1) Decentralization enhancing public sector efficiency (efficiency effect), and (2) decentralization reducing the distance between bureaucrats and economic agents, which increases the probability of detection of shadow economic activities (deterrence effect). Using various measures of fiscal, political and government employment decentralization in a cross-section of countries, we find the deterrence effect to be of more importance. The deterrence effect is stronger, the lower the degree of institutional quality. Remarkably, we find no robust evidence of the efficiency effect.
Subjects:decentralization
shadow economy
JEL:O17
H77
D78
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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