This paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s. I propose a novel explanation for this phenomenon: the sharp increase in market competition worldwide, which reduces prices and profits and drives firms into the shadow economy. Empirical evidence from a panel covering 45 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy. The effect is strongest in low-tax, high-corruption countries that do not provide the public services which make it worthwhile for firms to remain official despite growing competitive pressure.
The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition? / GIARDINO-KARLINGER, Liliane. - In: WORLD DEVELOPMENT. - ISSN 0305-750X. - 37:10(2009), pp. 1600-1611. [10.1016/j.worlddev.2009.03.001]
The Underground Economy in the Late 1990s: Evading Taxes, or Evading Competition?
Liliane Karlinger
2009
Abstract
This paper studies the driving forces behind the considerable expansion of the underground economy during the late 1990s. I propose a novel explanation for this phenomenon: the sharp increase in market competition worldwide, which reduces prices and profits and drives firms into the shadow economy. Empirical evidence from a panel covering 45 countries from 1995 to 2000 shows that increased competition is indeed correlated with an expansion of the underground economy. The effect is strongest in low-tax, high-corruption countries that do not provide the public services which make it worthwhile for firms to remain official despite growing competitive pressure.File | Dimensione | Formato | |
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