Size, Trend, and Policy Implications of the Underground Economy

Renzo Orsi, Davide Raggi and Francesco Turino

Review of Economic Dynamics, 2014, vol. 17, issue 3, 417-436

Abstract: We study the underground economy within a dynamic and stochastic general equilibrium framework. Our model combines limited tax enforcement with an otherwise standard two-sector neoclassical stochastic growth model. The Bayesian estimation of the model based on Italian data provides evidence in favor of an important underground sector in Italy, with a size that has increased steadily over the whole sample period. We show that this pattern is due to a steady increase in taxation. Fiscal policy experiments suggest that a moderate tax cut, along with a stronger effort in the monitoring process, causes a sizeable reduction in the size of the underground economy and provides a positive stimulus for the regular economy. Both of these effects jointly increase total fiscal revenues. (Copyright: Elsevier)

Keywords: DSGE; Underground economy; Tax evasion; Bayesian estimation; Italy (search for similar items in EconPapers)
JEL-codes: C11 E26 E32 E62 H26 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (54)

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DOI: 10.1016/j.red.2013.11.001

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