Corruption, Centralization, and the Shadow Economy

In their pioneering work on corruption, Shleifer and Vishny (1993) find that a centralized bureaucracy results in lower bribes. Our paper extends the analysis to economies with formal and informal sectors. When corrupt officials operate in both sectors, bureaucratic centralization is beneficial when confined to the formal sector; however, we show that cross‐sector centralization can result in higher bribes and lower welfare. Furthermore, contrary to Choi and Thum (2005), we demonstrate that, depending on the organization of the bureaucracy and the productivity of the informal sector, the presence of the shadow economy may have adverse effects on corruption and welfare.