We analyze the relationship between the underground (or shadow) economy and the formal or legal sector in the presence of corruption in both sectors. Firms choose between operating in the legal and in the underground economy. With morally heterogeneous law enforcement agents monitoring the...

Bribery, it has been argued, allocates resources efficiently. We show that this conclusion need not hold in a dynamic extension of a simple static model in which it does. When permits are awarded over time and applicants can reapply, a partially honest bureaucracy results in inefficiency. This...

We analyse the optimality of information revelation of hidden attributes of “credence goods” via alternative labelling procedures. When consumers are heterogeneous in their willingness to pay for the hidden attribute, producers can either self-label their products, or have them certified by...

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...