Decentralization, Corruption, and the Unofficial Economy

37 Pages Posted: 1 Jun 2007  

Michael Alexeev

Indiana University Bloomington - Department of Economics; Russian Presidential Academy of National Economy and Public Administration

Luba Habodaszova

City University Slovakia

Date Written: May 31, 2007

Abstract

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.

Keywords: decentralization, local public goods, corruption, unofficial economy

JEL Classification: H77, D73, O17

Suggested Citation

Alexeev, Michael and Habodaszova, Luba, Decentralization, Corruption, and the Unofficial Economy (May 31, 2007). CAEPR Working Paper No. 2007-008. Available at SSRN: https://ssrn.com/abstract=990061 or http://dx.doi.org/10.2139/ssrn.990061

Michael V. Alexeev (Contact Author)

Indiana University Bloomington - Department of Economics ( email )

Wylie Hall 105
Bloomington, IN 47405-6620
United States

Russian Presidential Academy of National Economy and Public Administration ( email )

pr. Vernadskogo, 84
Moscow, 119571
Russia

Luba Habodaszova

City University Slovakia ( email )

Panonska cesta 17
851 04 Bratislava
Slovakia

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