International Tax and Public Finance

, Volume 22, Issue 1, pp 1–40 | Cite as

Keeping both corruption and the shadow economy in check: the role of decentralization



This paper puts forward a framework for evaluating the effects of governmental decentralization on the shadow economy and corruption. The theoretical analysis demonstrates that decentralization exerts both a direct and an indirect impact on the shadow economy and corruption. First, decentralization helps to mitigate government-induced distortions, thus limiting the extent of corruption and the informal sector in a direct way. Second, in more decentralized systems, individuals have the option to avoid corruption by moving to other jurisdictions, rather than going underground. This limits the impact of corruption on the shadow economy and implies that decentralization is also beneficial in an indirect way. As a result, our analysis documents a positive relationship between corruption and the shadow economy; however, this link proves to be lower in decentralized countries. To test these predictions, we developed an empirical analysis based on a cross-country database of 145 countries that includes different indexes of decentralization, corruption and shadow economy. The empirical evidence is consistent with the theory.


Shadow economy Federalism Decentralization Corruption 

JEL Classification

O17 H77 H11 D73 


  1. Ades, A., & Di Tella, R. (1999). Rents, competition and corruption. The American Economic Review, 89(4), 982–993. CrossRefGoogle Scholar
  2. Alexeev, M., & Habodaszova, L. (2012). Decentralization, corruption, and the shadow economy. Public Finance and Management, 12, 74–99. Google Scholar
  3. Andvig, J. C. (2005). A house of straw, sticks or bricks’? Some notes on corruption empirics. Paper presented to IV Global Forum on Fighting Corruption and Safeguarding Integrity, Session Measuring Integrity, June 7, 2005. Google Scholar
  4. Arikan, G. (2004). Fiscal decentralization: a remedy for corruption? International Tax and Public Finance, 11(2), 175–195. CrossRefGoogle Scholar
  5. Besley, T. (2006). Principled agents? The political economy of good government. Oxford: Oxford University Press. Google Scholar
  6. Buehn, A., & Schneider, F. (2012a). Shadow economies around the world: novel insights, accepted knowledge, and new estimates. International Tax and Public Finance, 19(1), 139–171. CrossRefGoogle Scholar
  7. Buehn, A., & Schneider, F. (2012b). Corruption and the shadow economy: like oil and vinegar, like water and fire? International Tax and Public Finance, 19(1), 172–194. CrossRefGoogle Scholar
  8. Choi, J. P., & Thum, M. (2005). Corruption and the shadow economy. International Economic Review, 46(3), 817–836. CrossRefGoogle Scholar
  9. Dell’Anno, R. (2007). Shadow economy in Portugal: an analysis with the MIMIC approach. Journal of Applied Economics, 10(2), 253–277. Google Scholar
  10. Dell’Anno, R., & Schneider, F. (2008). A complex approach to estimate shadow economy: the structural equation modelling. In M. Faggini & T. Lux (Eds.), Coping with the complexity of economics. Springer-Verlag new economic windows series. Google Scholar
  11. Dreher, A., & Schneider, F. (2010). Corruption and the shadow economy: an empirical analysis. Public Choice, 144(1), 215–238. CrossRefGoogle Scholar
  12. Dreher, A., Kotsogiannis, C., & McCorriston, S. (2009). How do institutions affect corruption and the shadow economy? International Tax and Public Finance, 16(6), 773–796. CrossRefGoogle Scholar
  13. Echazu, L., & Bose, P. (2008). Corruption, centralization, and the shadow economy. Southern Economic Journal, 75(2), 524–537. Google Scholar
  14. Elazar, D. J. (1995). From statism to federalism: a paradigm shift. Publius, 25(2), 5–18. Google Scholar
  15. Enikolopov, R., & Zhuravskaya, E. (2007). Decentralization and political institutions. Journal of Public Economics, 91(2), 2261–2290. CrossRefGoogle Scholar
  16. Fan, S., Lin, C., & Treisman, D. (2009). Political decentralization and corruption: evidence around the world. Journal of Public Economics, 93(1–2), 14–34. CrossRefGoogle Scholar
  17. Fisman, R., & Gatti, R. (2002a). Decentralization and corruption: evidence across countries. Journal of Public Economics, 83(3), 325–345. CrossRefGoogle Scholar
  18. Fisman, R., & Gatti, R. (2002b). Decentralization and corruption: evidence from U.S. federal transfer programs. Public Choice, 113, 25–35. CrossRefGoogle Scholar
  19. Friedman, E., Johnson, S., Kaufmann, D., & Zoido-Lobatón, P. (2000). Dodging the grabbing hand: the determinants of unofficial activity in 69 countries. Journal of Public Economics, 76, 459–493. CrossRefGoogle Scholar
  20. Hayek, F. A. (1948). Individualism and economic order. Chicago: University of Chicago Press. Google Scholar
  21. Johnson, S., Kaufmann, D., & Schleifer, A. (1997). The unofficial economy in transition. Brookings Papers on Economic Activity, 2, 159–220. CrossRefGoogle Scholar
  22. Johnson, S., Kaufmann, D., & Zoido-Lobatón, P. (1998). Regulatory discretion and the unofficial economy. The American Economic Review, 88(2), 387–392. Google Scholar
  23. Johnson, S., Kaufmann, D., & Zoido-Lobatón, P. (1999). Corruption, public finances and the unofficial economy (Policy Research Working Paper Series 2169). The World Bank. Google Scholar
  24. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1999). The quality of government. Journal of Economics, Law and Organization, 15(1), 222–279. CrossRefGoogle Scholar
  25. Lederman, D., Loayza, N. V., & Soares, R. (2005). Accountability and corruption: political institutions matter. Economics and Politics, 17, 1–35. CrossRefGoogle Scholar
  26. Lessmann, C., & Markwardt, G. (2010). One size fits all? Decentralization, corruption, and the monitoring of bureaucrats. World Development, 38(4), 631–646. CrossRefGoogle Scholar
  27. Lijphart, A. (1984). Democracies: patterns of majoritarian and consensus government in twenty-one countries. New Haven/London: Yale University Press. Google Scholar
  28. Loayza, N. A. (1996). The economics of the informal sector. A simple model and some empirical evidence from Latin America. Carnegie-Rochester Conference Series on Public Policy, 45, 129–162. CrossRefGoogle Scholar
  29. Mocan, N. (2004). What determines corruption? International evidence from micro data (NBER working paper 10460). Google Scholar
  30. Oates, W. E. (1972). Fiscal federalism. San Diego: Harcourt Brace Jovanovich. Google Scholar
  31. Oates, W. E. (1999). An essay on fiscal federalism. Journal of Economic Literature, 37, 1120–1149. CrossRefGoogle Scholar
  32. Panizza, U. (1999). On the determinants of fiscal centralization: theory and evidence. Journal of Public Economics, 74, 97–139. CrossRefGoogle Scholar
  33. Persson, T., & Tabellini, G. (2003). The economic effects of constitutions. Munich lectures in economics. Cambridge: MIT Press. Google Scholar
  34. Riker, W. S. (1964). Federalism. Origin, operation, significance. Boston: Little Brown. Google Scholar
  35. Rodden, J. (2004). Comparative federalism and decentralization: on meaning and measurement. Comparative Politics, 36(4), 481–500. CrossRefGoogle Scholar
  36. Shea, J. (1997). Instrument relevance in multivariate linear models: a simple measure. Review of Economics and Statistics, 79, 348–352. CrossRefGoogle Scholar
  37. Schneider, F., & Enste, D. H. (2000). Shadow economies: size, causes, and consequences. Journal of Economic Literature, 38, 77–114. CrossRefGoogle Scholar
  38. Shleifer, A., & Vishny, R. (1993). Corruption. The Quarterly Journal of Economics, 108(3), 599–617. CrossRefGoogle Scholar
  39. Søreide, T. (2005). Is it right to rank? Limitations, implications and potential improvements of corruption indices. Paper presented to IV Global Forum on Fighting Corruption and Safeguarding Integrity, Session Measuring Integrity, June 7, 2005. Google Scholar
  40. Stegarescu, D. (2005). Public sector decentralization: measurement concepts and recent international trends. Fiscal Studies, 26(3), 301–333. CrossRefGoogle Scholar
  41. Teobaldelli, D. (2011). Federalism and the shadow economy. Public Choice, 146(3–4), 269–289. CrossRefGoogle Scholar
  42. Tiebout, C. (1956). A pure theory of local expenditures. Journal of Political Economy, 64, 416–424. CrossRefGoogle Scholar
  43. Torgler, B., Schneider, F., & Schaltegger, C. A. (2010). Local autonomy, tax morale and the shadow economy. Public Choice, 144(1), 293–321. CrossRefGoogle Scholar
  44. Treisman, D. (2000). The causes of corruption: a cross-national study. Journal of Public Economics, 76, 399–457. CrossRefGoogle Scholar
  45. Treisman, D. (2006). Decentralization, fiscal incentives, and economic performance: a reconsideration. Economics and Politics, 18, 219–235. CrossRefGoogle Scholar
  46. Treisman, D. (2007). What have we learned about the causes of corruption from ten years of cross-national empirical research? Annual Review of Political Science, 10, 211–244. CrossRefGoogle Scholar
  47. Treisman, D. (2008). Decentralization Data Set. Available at

Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.University of SalernoFiscianoItaly
  2. 2.University of Urbino “Carlo Bo”UrbinoItaly

Personalised recommendations