How Do Institutions Affect Corruption and the Shadow Economy?

University of Exeter Discussion Paper

26 Pages Posted: 23 Feb 2005

See all articles by Axel Dreher

Axel Dreher

Heidelberg University

Christos Kotsogiannis

University of Exeter

Steve McCorriston

University of Exeter

Date Written: February 2005

Abstract

This paper analyzes a simple model that captures the relationship between institutional quality, the shadow economy and corruption. It shows that an improvement in institutional quality reduces the shadow economy and affects the corruption market. The exact relationship between corruption and institutional quality is, however, ambiguous and depends on the relative effectiveness of the institutional quality in the shadow and corruption markets. The predictions of the model are empirically tested - by means of Structural Equation Modelling that treats the shadow economy and the corruption market as latent variables - using data from OECD countries. The results show that an improvement in institutional quality reduces the shadow economy directly and corruption both directly and indirectly (through its effect on the shadow market).

Keywords: Corruption, Shadow Economies, OECD countries, Latent Variables, Structural Equation Modelling

JEL Classification: H10, O1, K49, C39

Suggested Citation

Dreher, Axel and Kotsogiannis, Christos and McCorriston, Steve, How Do Institutions Affect Corruption and the Shadow Economy? (February 2005). University of Exeter Discussion Paper. Available at SSRN: https://ssrn.com/abstract=670662 or http://dx.doi.org/10.2139/ssrn.670662

Axel Dreher (Contact Author)

Heidelberg University ( email )

Grabengasse 1
Heidelberg, 69117
Germany

HOME PAGE: http://www.axel-dreher.de

Christos Kotsogiannis

University of Exeter ( email )

Exeter EX4 4QX, Devon
United Kingdom

Steve McCorriston

University of Exeter ( email )

Exeter EX4 4QX, Devon
United Kingdom

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