Decentralization and the Shadow Economy: Oates Meets Allingham-Sandmo

28 Pages Posted: 30 Aug 2011

See all articles by Andreas Buehn

Andreas Buehn

University of Cooperative Education Bautzen

Christian Lessmann

Technology University of Braunschweig; Ifo Branch Dresden; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Gunther Markwardt

Dresden University of Technology - Faculty of Economics and Business Management

Date Written: August 30, 2011

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: Decentralization enhancing public sector efficiency (efficiency effect), and 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.

Keywords: decentralization, shadow economy

JEL Classification: O170, H770, D780

Suggested Citation

Buehn, Andreas and Lessmann, Christian and Markwardt, Gunther, Decentralization and the Shadow Economy: Oates Meets Allingham-Sandmo (August 30, 2011). CESifo Working Paper Series No. 3551, Available at SSRN: https://ssrn.com/abstract=1919510

Andreas Buehn

University of Cooperative Education Bautzen ( email )

Loebauer Strasse 1
Bautzen, 02625
Germany

Christian Lessmann

Technology University of Braunschweig ( email )

Abt-Jerusalem-Str. 7
Braunschweig, D-38106
Germany

Ifo Branch Dresden ( email )

Poschinger Str. 5
Munich, 01069
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

Gunther Markwardt (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
D-01062 Dresden, Saxony
Germany
++49 (0)351/463-33972 (Phone)

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