Abstract:
This paper uses a Heckscher-Ohlin nugget framework with both traded
and non-traded goods. Traded goods are subject to tax whereas non-traded good
does not pay tax but is beset with corruption related intermediation. Our motive
is to investigate the comparison of the effects of corruption and tax cut. We
assume only the non-traded sector to be corruption affected. We argue that a fall
in the degree of corruption surprisingly increases the number of intermediators
while tax change has no effect on it. But the size of the intermediation activities
expands in both the cases. Low corruption diminishes the exportable production
and raises importable production while a tax cut does not have any such effect.
The welfare implication is ambiguous in case of a decrease in cost of corruption.
A tax cut, however, raises welfare unambiguously.
