Hidden Economy and Corruption: A Law and Economics View

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Presentation transcript:

Hidden Economy and Corruption: A Law and Economics View Boris Begović Center for Liberal-Democratic Studies CSD Anti-corruption Program Series Session 2: Hidden Economy and Corruption 9th September 2005

Corruption: a free choice Economist’s thinking: rational behavior and free choice of individuals Economic efficiency is about transaction costs The easer we/they do business, the better for everyone

Staying Formal: benefits and costs Legal protection No evasive actions No evasive corruption Corruption burden, informal taxation Corruption burden opportunity costs Tax burden Compliance burden, business strategies Compliance burden, resources Corruption, expenses Corruption, resources

Going Hidden: benefits and costs No legal Protection Evasive Actions Evasive Corruption Corruption burden, expenses Corruption burden, opportunity costs No tax burden No compliance burden, fee business strategies No compliance burden, resources No corruption, informal taxation No corruption, resources

Legal Protection – Rule of Law Protection of property rights Efficient contract enforcement Alternative arrangements for protection Formal – legal protection as public good Both deterrence and litigations (sanctions) Informal – private protection Self protection or the business of private protection

Enforcing Contracts Bulgaria Kyrgiz Republic Serbia Ukraine Number of Procedures 34 46 36 28 Days 440 492 1,028 269 Cost (% of debt) 14.0 47.9 23.0 11.0 Source: World Bank, Doingbusiness database The methodolgy was developed by Djankov et al. (2003)

The Quality of Legal System Crucial factor of informality Good legislation (simple and transparent) Judicial administrative capacity Judicial independence and integrity Judicial corruption: institutionalized one (executive branch) Judicial corruption: no intermediaries

Judicial Corruption Serbia: some measurements has been done Judicial corruption as a factor of weak rule of law Both incompetence and inefficiency Weak incentives in terms of accountability Misunderstanding: independence and accountability to none

Why? Wealth and Poverty of Nations: Why Some Are So Rich and Some Are So Poor? (by David S. Landes) Because of the transaction costs If rule of law exists, going formal reduces transaction costs High or low equilibrium: the choice of nations

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