Dilip K Bhattacharyya Susmita Ghose This paper argues that corruption, in terms of bribes and kickbacks, is primarily generated by firms due to regulatory conditions. To recover the cost of bribery, firms hide their production output which then remains unrecorded in the official statistics. Hence, by estimating the unrecorded income of the industrial sector, it is possible to examine the growth of corruption. A method for estimating sectoral unrecorded income is suggested in this paper, and from the estimated unrecorded income of the industrial sector we demonstrate that the large increases in corruption signalled by recent reported cases are justifiable. Our empirical results also suggest that the disaggregated 'hidden economy' estimates are more informative than aggregated estimates.
