Decentralization, Corruption, and the Unofficial Economy
Indiana University Bloomington - Department of Economics
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
Date posted: June 1, 2007
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