1. 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

2. 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

3. 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

4. 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

5. 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

6. 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)

7. 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

8. 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

9. 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