Pollution, Shadow Economy and Corruption: Theory and Evidence

34 Pages Posted: 14 Nov 2011

See all articles by Amit K. Biswas

Amit K. Biswas

Visva-Bharati University - Department of Economics and Politics; University of Bonn - Department of Economics

Mohammad Reza Farzanegan

University of Marburg - Center for Near and Middle Eastern Studies (CNMS)

Marcel P. Thum

Dresden University of Technology - Faculty of Economics and Business Management; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; Institute for Corruption Studies

Date Written: November 14, 2011

Abstract

We study how the shadow economy affects pollution and how this effect depends on corruption levels in public administration. Production in the shadow economy allows firms to avoid environmental regulation policies; a large informal sector may be accompanied by higher pollution levels. Our theoretical model predicts that controlling the levels of corruption can limit the effect of the shadow economy on pollution. We use panel data covering the period from 1999–2005 from more than 100 countries to test this theoretical prediction. Our estimates confirm that the relationship between the shadow economy and the levels of pollution are dependent on the levels of corruption. Our results hold when we control for the effects of other determinants of pollution, time varying common shocks, country-fixed effects and various additional covariates.

Keywords: environmental pollution, shadow economy, corruption, panel data

JEL Classification: Q530, Q560, Q580

Suggested Citation

Biswas, Amit K. and Farzanegan, Mohammad Reza and Thum, Marcel, Pollution, Shadow Economy and Corruption: Theory and Evidence (November 14, 2011). CESifo Working Paper Series No. 3630, Available at SSRN: https://ssrn.com/abstract=1959268

Amit K. Biswas

Visva-Bharati University - Department of Economics and Politics ( email )

Santiniketan 731235, West Bengal
India
+919433126538 (Phone)

HOME PAGE: http://sites.google.com/visva-bharati.ac.in/amitkbiswas/Home

University of Bonn - Department of Economics ( email )

Bonn
Germany

Mohammad Reza Farzanegan

University of Marburg - Center for Near and Middle Eastern Studies (CNMS) ( email )

Deutschhausstraße 12
Marburg, 35037
Germany

HOME PAGE: http://www.uni-marburg.de/cnms/wirtschaft

Marcel Thum (Contact Author)

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

Mommsenstrasse 13
Dresden, D-01062
Germany

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

Poschinger Str. 5
Munich, 01069
Germany

Institute for Corruption Studies

Stevenson Hall 425
Normal, IL 61790-4200
United States

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