A Matching Model of Endogenous Growth and Underground Firms

Gaetano Lisi and Maurizio Pugno

MPRA Paper from University Library of Munich, Germany

Abstract: Economic growth and unemployment exhibit an ambiguous relationship – according to empirical studies. This ambiguity can be investigated by observing the role of the underground economy in shaping the productivity of firms. Indeed, unemployment may be absorbed by underground firms, which adopt backward technology, at the cost of reduced economic growth. Alternatively, unemployment diminishes because productivity grows by employing workers who prefer to become skilled, and thus not to work in underground firms. This paper develops these arguments by using a matching model with underground firms and heterogeneous entrepreneurial ability, and by assuming skill-driven growth. Economic growth thus becomes endogenous, and both the underground sector and unemployment become persistent. The main result is that, under conditions of strict monitoring of the regularity of firms, the underground economy is squeezed, unemployment is reduced, and growth is high, whereas in the case of lax monitoring, the underground economy expands, unemployment is absorbed, and growth is low.

Keywords: unemployment; underground firms; entrepreneurship; endogenous growth; human capital; education; matching models. (search for similar items in EconPapers)
JEL-codes: E26 J24 J64 L26 (search for similar items in EconPapers)
Date: 2015-02-16
New Economics Papers: this item is included in nep-ent, nep-gro, nep-iue, nep-lab and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: A matching model of endogenous growth and underground firms (2015)
Working Paper: A Matching Model of Endogenous Growth and Underground Firms (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:63336

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