Market and underground activities in a two-sector dynamic equilibrium model

Abstract

In this paper a two sector dynamic general equilibrium model is developed in order to evaluate the implications of the underground economy from a business cycle perspective. There are three main results. First, introducing an underground sector improves the fit of the model to the data, especially along several important labor market dimensions. Second, the model produces substantial internal propagation of temporary shocks. Third, it is shown that underground activities offer risk sharing opportunities by allowing households to smooth income through a proper labor allocation between the two sectors. Copyright Springer-Verlag Berlin/Heidelberg 2004Two-sector dynamic general equilibrium model, Underground economy, Propagation of shocks, Taxation.,

Consumption and income smoothing

“…bits (a) and (b). Denmark, Greece, Portugal and Spain (see Busato and Chiarini, 2004). Moreover, the simulation outcomes are robust for many countries presenting a large size of underground activities.…”

Fiscal consolidation with tax evasion and corruption

“…13 We find that the presence of corruption and tax evasion is particularly important for the effects of consolidations on the unemployment 10 In this case, the 'high tax evasion' group consists of Belgium, Ireland, Italy, Portugal and Spain, whilst the 'low tax evasion' group consists of Australia, Austria, France, the UK and the US. The 'high corruption' group consists of France, Italy, Japan, Portugal and Spain, and the 'low corruption' group consists of Australia, Austria, Denmark, Finland and Sweden.…”

The Underground Economy in a Matching Model of Endogenous Growth

“…More generally, an effective policy should seek to increase entrepreneurial ability, typically through education, so that overall economic performance improves, both because of the sectoral composition effect, and because of the positive level effect of each firm. (Boeri and Garibaldi, 2006;Busato and Chiarini, 2004).…”