Piculescu, VioletaHibbs, Jr, Douglas A.2006-06-202007-02-092007-02-0920061403-2465http://hdl.handle.net/2077/2706How do government-supplied institutional benefits and the taxation and regulation of produc- ers affect the propensity of private firms to enter the unofficial economy and evade taxation? We propose a model in which the incentive of firms to operate underground depends on tax rates relative to firm-specific thresholds of tax toleration that are decisively affected by quality of governance - in particular by the presence of high-grade institutions delivering services enhancing official production that anchor profit-maximizing firms to the official economy. Some key predictions of the model concerning the determinants of firms' tax toleration and tax compliance receive broad support from empirical analyses of enterprise-level data from the World Bank's World Business Environment Surveys.32 pages309158 bytesapplication/pdfeninstitutions; corruption; tax evasion; tax toleration; unofficial economy; underground economy; black economy; WEBSReportEconomics