Corruption and the shadow economy at the regional level

• Author: Robert Gillanders,Sinikka Parviainen
• DOI: http://doi.org/10.1111/rode.12517
• Published date: 01 November 2018
• Date: 01 November 2018

REGULAR ARTICLE

Corruption and the shadow economy at the

regional level

Robert Gillanders

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Sinikka Parviainen

2

1

Dublin City University, and Hanken

School of Economics

2

Aalto University School of Business

Correspondence

Robert Gillanders, Room Q251, Dublin

City University Business School, Dublin

9, Ireland.

Email: rgillanders@gmail.com

Funding information

Foundation for Economic Education

(Liikesivistysrahasto)

Abstract

The links between corruption and the shadow economy

have mostly been studied empirically at the country level.

This paper contributes to this literature by examining the

relationship at the sub-national level. We also add value

to the existing literature in that we employ data capturing

the extent to which the shadow economy and corruption

are viewed as problems by firms as opposed to the stan-

dard measures of corruption and the size of the shadow

economy. Using World Bank Enterprise Survey data, we

find that sub-national units in which more firms report

that corruption is an obstacle to their operations also tend

to have more firms that report that the practices of infor-

mal competitors are an obstacle and vice versa. Sub-

Saharan Africa is different in that neither of these find-

ings is evident in that sub-sample.

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INTRODUCTION

This paper contributes to an interesting and important literature that has sought to establish the

existence and nature of the relationship between corruption and the shadow economy. The

weight of the existing evidence, which we discuss below, suggests that corruption and the sha-

dow economy are complements in the sense that countries with a larger shadow economy tend

to perform worse on various indices of perceived corruption. We contribute to this literature by

taking the analysis to the regional (or sub-national) level using data from the World Bank’s

Enterprise Surveys (ES). This offers a new perspective, increases the available sample size, and

exploits the within-country variation of these important variables. It also considers meaningfully

different measures of both corruption and the shadow economy in that we examine the extent to

which they are viewed as problematic, rather than their prevalence. We ask whether sub-national

regions in which more firms say that corruption is a problem for their operations also have more

DOI: 10.1111/rode.12517

Rev Dev Econ. 2018;22:1729–1743. wileyonlinelibrary.com/journal/rode ©2018 John Wiley & Sons Ltd

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