Regulatory Discretion and the Unofficial Economy

11 Pages Posted: 5 Apr 2008  

Simon Johnson

Massachusetts Institute of Technology (MIT) - Entrepreneurship Center; National Bureau of Economic Research (NBER)

Daniel Kaufmann

Natural Resource Governance Institute (NRGI); The Brookings Institution

Pablo Zoido

Stanford University - Graduate School of Business

Abstract

Johnson, Kaufmann, and Shleifer (1997) find that the share of the unofficial economy in GDP is determined by the extent of control rights held by politicians and bureaucrats in post-communist economies. Exploring in more detail the role of bribes and using a broader data set from the OECD, Latin America, and transition economies, we find that the unofficial economy accounts for a larger share of GDP when there is more corruption and when the rule of law is weaker. While these findings are consistent with the earlier results for transition economies, in the larger country sample we find it is not necessarily the case that more regulation or higher taxes directly increases the size of the unofficial economy. The problem appears to be not regulation or taxation per se, but whether the state administrative system can operate without corruption. A high level of regulatory discretion helps create the potential for corruption and drive firms into the unofficial economy.

Suggested Citation

Johnson, Simon and Kaufmann, Daniel and Zoido, Pablo, Regulatory Discretion and the Unofficial Economy. American Economic Review, Vol. 88, No. 2, 1998. Available at SSRN: https://ssrn.com/abstract=1116727

Simon Johnson

Massachusetts Institute of Technology (MIT) - Entrepreneurship Center ( email )

United States
617-253-8412 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Daniel Kaufmann (Contact Author)

Natural Resource Governance Institute (NRGI) ( email )

80 Broad Street
New York, NY 10004
United States

HOME PAGE: http://www.resourcegovernance.org

The Brookings Institution ( email )

1775 Massachusetts Avenue, NW
Washington, DC 20036
United States

HOME PAGE: http://www.brookings.edu/experts/kaufmannd

Pablo Zoido

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
United States

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