Put differently, entrepreneurs facing an increase in the bribe that would have otherwise driven them to the unofficial economy are sufficiently compensated by the increase in their income from greater public good provision to stay in the official economy.
This is a particularly interesting result in that it allows for a possible simultaneous increase in corruption measured by the size of the bribe and an increase in public good provision, and the reduction in the relative size of unofficial economy.
In particular, our model includes taxation administered by the central government, locally produced productivity-enhancing public goods, bribes charged by the local government from heterogeneous entrepreneurs, and the possibility for the latter to move to the unofficial economy in order to escape both bribes and taxation.
For example, contract enforcement and property rights protection by the government for contracts and property in the unofficial economy is at best limited.
In such sector as retail trade and agriculture, where the unofficial economy is stronger and measurement problems are more daunting, companies paid far less in tax than would be expected from their contribution to GDP.
TABLE 4 Share of Unofficial Economy * in GDP, 1989-95 1989 1990 1991 1992 1993 1994 1995 Azerbaijan 12.
The Soviet Union's unofficial economy was a system in which formal laws were routinely violated, while such activities were recognized as being essential to the smooth functioning of the economy.
On the basis of international evidence of a rough parallel between demand for electricity consumption and growth in GDP, they take the rate of change in electricity consumption compared with the rate of change in official GDP, as an indication of the rate of change in the size of the unofficial economy.
Unofficial economy share estimates from Kaufmann and Kaliberda (1996), defined as percent of unofficial economy in overall GDP.
Finally, the micro-evidence from the survey of 200 firms in Ukraine and Russia also suggests a relationship between the size of the unofficial economy and corruption: total extra-legal payments (bribes, facilitation payments, etc.
See Daniel Kaufmann and Aleksander Kaliberda, "Integrating the Unofficial Economy into the Dynamics of Post-Socialist Economies: A Framework of Analysis and Evidence," in B.