Size, Trend, and Policy Implications of the Underground Economy

Renzo Orsi, Davide Raggi and Francesco Turino

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: We study the underground economy in 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 steadily increased over the whole sample period. We show that this pattern is due to a persistent increase in taxation. Fiscal policy experiments suggest that a moderate tax cut, along with a stronger effort in the monitoring process, causes a sensitive reduction in the size of the underground economy and positive stimulus to the regular sector that jointly increase the total fiscal revenues.

JEL-codes: E65 O41 O52 (search for similar items in EconPapers)
Date: 2012-03
New Economics Papers: this item is included in nep-dge, nep-iue and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Journal Article: Size, Trend, and Policy Implications of the Underground Economy (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:wp818

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