Shadow Economy, Rent-Seeking Activities and the Perils of Reinforcement of the Rule of Law

An economy is considered where a possibility to seek rents (a particular case of this activity is corruption) exists along with production. A producer is able to hide part of his output from both bribery and taxation. It is shown that the presence of a shadow sector has different effects in economies with hight and low rent-seeking. As expected, in the economy with low corruption the direct law enforcement is beneficial for growth, and reduces the shadow setor. However, in the highly corrupt economy, combating the shadow economy reduces output and increases corruption, while combating corruption reduces the shadow economy.

[1]  Simon Johnson,et al.  Dodging the Grabbing Hand: The Determinants of Unofficial Activity in 69 Countries , 1999 .

[2]  T. Boeri,et al.  Shadow Activity and Unemployment in a Depressed Labour Market , 2002 .

[3]  Aart Kraay,et al.  Aggregating Governance Indicators , 1999 .

[4]  Rafael Di Tella,et al.  Rents, Competition, and Corruption , 1999 .

[5]  N. Campos.  NEVER AROUND NOON : ON THE NATURE AND CAUSES OF THE TRANSITION SHADOW * , 2000 .

[6]  Norman V. Loayza,et al.  The Economics of the Informal Sector: A Simple Model and Some Empirical Evidence from Latin America , 1996 .

[7]  James O. Finckenauer.  The Russian “mafia” , 2004 .

[8]  Daniel Kaufmann,et al.  Seize the state, seize the day: state capture and influence in transition economies , 2003 .

[9]  J. Sobel.  Can We Trust Social Capital , 2002 .

[10]  D. North.  Institutions, Institutional Change and Economic Performance: Economic performance , 1990 .

[11]  Maxim Bouev,et al.  Transformational Decline and Preconditions of Growth in Russia , 1998 .

[12]  Simon Johnson,et al.  Regulatory Discretion and the Unofficial Economy , 2008 .

[13]  A. Krueger.  The Political Economy of the Rent-Seeking Society , 1974 .

[14]  Nuno Garoupa.  The Theory of Optimal Law Enforcement , 1997 .

[15]  Kevin M. Murphy,et al.  Why Is Rent-Seeking So Costly to Growth? , 1993 .

[16]  Simon Johnson,et al.  Corruption, Public Finances, and the Unofficial Economy , 1999 .

[17]  L. Xu,et al.  Ownership, Competition, and Corruption: Bribe Takers Versus Bribe Payers , 2002 .

[18]  Simon Johnson,et al.  The Unofficial Economy in Transition , 1997 .

[19]  D. Acemoglu.  Reward structures and the allocation of talent , 1995 .

[20]  Daniel Kaufmann,et al.  USING PERFORMANCE STANDARDS TO EVALUATE SOCIAL PROGRAMS WITH INCOMPLETE OUTCOME DATA : GENERAL ISSUES AND APPLICATION TO A HIGHER EDUCATION BLOCK GRANT PROGRAM , 1999 .

[21]  S. Pradhan,et al.  Anticorruption in transition : a contribution to the policy debate , 2000 .

[22]  Christopher J. Waller,et al.  Corruption: Top Down or Bottom Up? , 2002 .

[23]  E. Feige.  Underground Activity and Institutional Change: Productive, Protective and Predatory Behavior in Transition Economies , 1997 .

[24]  A. Shleifer,et al.  The Invisible Hand and the Grabbing Hand , 1996 .

[25]  Mark A. Schankerman,et al.  Intervention, Corruption and Capture: The Nexus between Enterprises and the State , 2000 .