Government Decentralization and Prevalence of the Shadow Economy

Public Finance Review, vol. 44, no. 2, pp. 263-288, 2016

Posted: 19 Mar 2016 Last revised: 19 Apr 2016

See all articles by Rajeev K. Goel

Rajeev K. Goel

Illinois State University - Department of Economics

James W. Saunoris

Eastern Michigan University

Date Written: 2016

Abstract

This article examines the effects of various types of decentralization of government functions on the cross-national prevalence of the shadow economy. Do countries with different prevalence of the shadow economy respond differently to government decentralization? We consider four dimensions of decentralization: (1) the tiers of government, (2) subnational government expenditures, (3) subnational government revenues, and (4) subnational government employment. While baseline results show decentralization to reduce the shadow economy, we uniquely find differences in the effectiveness across physical and fiscal decentralization -- greater physical decentralization is more effective at reducing widespread shadow economies, while fiscal decentralization is more effective with small shadow sectors.

Suggested Citation

Goel, Rajeev K. and Saunoris, James W., Government Decentralization and Prevalence of the Shadow Economy (2016). Public Finance Review, vol. 44, no. 2, pp. 263-288, 2016. Available at SSRN: https://ssrn.com/abstract=2749279

Rajeev K. Goel (Contact Author)

Illinois State University - Department of Economics ( email )

Normal, IL 61790-4200
United States

James W. Saunoris

Eastern Michigan University ( email )

Eastern Michigan University
Ypsilanti, MI 48197
United States

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