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Abstract

This paper offers a new theory of relationship between corruption and the shadow economy, one that defines it as either collusive – i.e., crony – or non - collusive. Using new estimates of state - level shadow economy size and data on corruption convictions of U.S. public officials for the 48 contiguous states, this study revisits this relationship empirically, controlling for spatial dependence. Additionally, the relationship between entrepreneurship and cronyism is investigated using productive entrepreneurship scores from Wiseman and Young (2014). Findings suggest that corruption and shadow economy size are positively related and both contagious and cross - contagious in the U.S. states. These results are fairly robust to several methods of spatial modeling. Results also reveal that productive entrepreneurship is contagious across states. Finally, this study attempt s to draw a linkage among formal sector entrepreneurial outcomes, corruption, and the shadow economy using spatial GMM/IV modeling in an entrepreneurship regression.

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