Date Added: Sep 2010
Corruption in the public sector is manifested both in collusive and noncollusive forms. Collusive corruption erodes tax compliance and leads to higher tax evasion. Noncollusive corruption stems from abuse of the public position by corrupt public officials to extort bribes from the private agents, thus, reduces their income. Importantly, in both types of interaction with the public sector the private agents are bound to face uncertainty with respect to their disposable incomes, as neither bribes paid nor gains from tax evasion are deterministic. To analyze effects of corruption by accounting for the uncertainty caused by it, a stochastic dynamic growth model is considered.