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Decentralization, Corruption, and the Unofficial Economy

Michael Alexeev

Indiana University Bloomington - Department of Economics

Luba Habodaszova

City University Slovakia

May 31, 2007

CAEPR Working Paper No. 2007-008

We analyze the implications of decentralization for the incentives of local governments to provide productivity enhancing local public goods and extort bribes from local entrepreneurs. We show that an increase in the share of locally raised tax revenue left with the local government raises its incentives to provide public goods and brings more entrepreneurs into the official economy. Corruption, measured by the size of bribes that local officials charge entrepreneurs for issuing licenses for operating officially, may increase or decrease, depending on the extent to which public goods enhance the entrepreneur's productivity. The tests using cross-sectional country-level data support the model's implications.

Number of Pages in PDF File: 37

Keywords: decentralization, local public goods, corruption, unofficial economy

JEL Classification: H77, D73, O17

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Date posted: June 1, 2007  

Suggested Citation

Alexeev, Michael and Habodaszova, Luba, Decentralization, Corruption, and the Unofficial Economy (May 31, 2007). CAEPR Working Paper No. 2007-008. Available at SSRN: http://ssrn.com/abstract=990061 or http://dx.doi.org/10.2139/ssrn.990061

Contact Information

Michael V. Alexeev (Contact Author)
Indiana University Bloomington - Department of Economics ( email )
Wylie Hall 105
Bloomington, IN 47405-6620
United States

Luba Habodaszova
City University Slovakia ( email )
Panonska cesta 17
851 04 Bratislava
Feedback to SSRN

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