Virtual Versus Physical Government Decentralization: Effects on Corruption and the Shadow Economy

Abstract

This paper examines the relative effectiveness of cross‐national virtual decentralization and physical decentralization of government functions on corruption and the shadow economy. Results show that while virtual decentralization reduces both corruption and the shadow economy, physical decentralization reduces only the shadow economy. The e‐government results are robust to alternate measures and specifications, while those of government tiers are not.

Business operations, contestability, bureaucratic holdup, and bribe solicitations

“…To do this, we add a variable to account for the number of branches/levels of government, where more levels of government are associated with a potentially greater supply of bribe solicitors at each level of government (Goel & Nelson, 2011; Goel & Saunoris, 2016). Interestingly, the coefficient on GovtCompete is positive and significant across all models.…”

“…These alternative considerations of government regulations involving both the scope and depth of government involvement tie to the literature on the quality of government (La Porta et al, 1999) and the structure of the government (or government decentralization) (see Dell’Anno & Teobaldelli, 2015; Fisman & Gatti, 2002; Goel & Saunoris, 2016). In this context, Duvanova (2014) makes the crucial distinction between regulatory policy and regulatory implementation and shows, at least in the two‐dozen odd post‐communist nations considered, how regulatory implementation might be more relevant for bribery.…”

“…On the one hand, competing bureaucrats might lessen the "price" of their services; on the other hand, corrupt bureaucrats facing jurisdictional competition might be able to better "price or service discriminate" and thereby increase their rent-seeking powers. To do this, we add a variable to account for the number of branches/levels of government, where more levels of government are associated with a potentially greater supply of bribe solicitors at each level of government (Goel & Nelson, 2011;Goel & Saunoris, 2016). Interestingly, the coefficient on GovtCompete is positive and significant across all models.…”

Masquerading the Government: Drivers of Government Impersonation Fraud

“…The seminal work of Tiebout argues that competing jurisdictions improve efficiency (e.g., see Hamilton 1991). Related empirical evidence varies somewhat (Espasa, Esteller-Moré, and Mora 2017; Goel et al 2017; Goel and Saunoris 2016; Kyriacou and Roca-Sagalés 2011), and it is a priori unclear whether decentralization would necessarily improve governance in terms of checking the incidence of government impersonation. Besides better governance, greater decentralization would result in greater name recognition of the identity and roles of government institutions, which would make impersonation more difficult.…”

The effects of corruption of public officials on the dimensions of financial sustainability of state governments in Mexico

“…Corruption of public officials influences the fiscal and financial conditions of governments in different ways. Corruption has adverse effects at the macroeconomic level, such as dropping investment and economic growth (Mauro, 1995, 1996), instigating inflation (Al‐Marhubi, 2000), provoking poor productivity (Lambsdorff, 2003), aggravating income inequality and poverty (Gupta et al, 1998; Justesen & Bjornskov, 2014), and promoting shadow economies (Goel & Saunoris, 2016). At the level of public budgeting and financial management, corruption presents several negative effects by reducing tax revenues (Khlif et al, 2016), lowering the quality of public infrastructure and services (Shleifer & Vishny, 1993), altering the level and composition of government spending (Liu & Mikesell, 2014), distorting the level and composition of public spending on education, health, and social services (Justesen & Bjornskov, 2014), and increasing public debt (Kim et al, 2017; Liu et al, 2017).…”