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This study examines the impact of fiscal equalization payments on the composition of government spending under endogenous growth theory. Analytical conjectures stemming from the model are tested empirically. As an instrumental variable for within-province variations in provinces' equalization entitlements, we use plausibly exogenous variations in the grant eligibility rule for the Canadian fiscal equalization system. We find that fiscal equalization payments have a significant negative effect on the share of productive expenditures and a significant positive effect on the share of unproductive government expenditures. Furthermore, the results show that fiscal equalization lowers the speed of cross-regional convergence in real gross domestic product per worker. [ABSTRACT FROM AUTHOR]

Summary This paper investigates the relationship between corruption, the shadow economy, and public debt. It additionally examines whether the shadow economy increases the adverse effects of corruption on public debt. The model is empirically tested for 126 countries over 1996–2012. Using Ordinary Least Squares (OLS), Fixed effects, system generalized method of moments (GMM) and instrumental variable estimation, and two measures of corruption—the Transparency International Corruption Perceptions Index and the Kaufmann et al. Corruption Index—results confirm that increased corruption and a larger shadow economy lead to an increase in public debt. Results additionally indicate that the shadow economy magnifies the effect of corruption on public debt suggesting that they act as complements. Results also suggest that a larger shadow economy reduces tax revenues and thus increases public debt, similarly, higher government expenditure enhances the effects of corruption on government debt. Hence reducing corruption should be a primary policy goal of governments. Given the complementarity detected between corruption and the shadow economy, reducing corruption would also lead to a fall in the size of the shadow economy and public debt. Reducing corruption will also minimize the adverse effects of corruption on government debt through government expenditure. [ABSTRACT FROM AUTHOR]

The existing empirical evidence suggests that in low-income economies, an increase in government spending leads to a reduction of growth. This article aims to explain this empirical fact by considering a growth model that incorporates a two-way relationship between corruption and government spending. That is, government spending gives rise to corruption and rent seeking, which feeds back by distorting the structure and size of government spending. In addition, the cost of corruption depends on the wage rate. Therefore, in low-income economies, increases in government spending tend to generate larger social losses caused by a higher level of rent dissipation and a concomitant rise in corruption and government inefficiency. Consequently, in such economies, an increase in government spending is more likely to result in a decline of economic growth. (JEL H3, O11, O41 ) [ABSTRACT FROM AUTHOR]

We develop an endogenous growth model à la Barro (1990), augmented with income tax evasion. Unlike many traditional rational choice models of tax evasion, the numerical simulations of our model do not produce counter-intuitive results. Further, we show that: (i) accounting for evasion costs (while capturing the full risk associated with the tax evasion process) is important for obtaining realistic relationships between key model variables; (ii) productive government expenditures explicitly affect the economy's tax evasion rate; (iii) Barro's natural efficiency condition for setting the optimal statutory tax rate holds even in the presence of tax evasion; (iv) given realistic estimates of the public expenditure externality, the average marginal income tax rate in Australia is not too far away from the optimal one; and (v) differences in tax evasion opportunities aggravate inequality over time. [ABSTRACT FROM AUTHOR]