Entrepreneurship and the Hidden Economy: An Extended Matching Model

32 Pages Posted: 21 Jul 2009

See all articles by Gaetano Lisi

Gaetano Lisi

University of Cassino - Department of Economic Sciences

Maurizio Pugno

University of Cassino - Department of Economics and Law

Date Written: July 19, 2009

Abstract

This paper develops a standard matching model to address the problem of the hidden sector, as it is characterised in Italy, i.e. framed in a rather advanced economic and institutional setting, but also linked to the socio-economic regional dualism. The main novel features of the model are that entrepreneurial ability is heterogeneous, and that regular firms receive negative externalities from the hidden sector, and positive externalities from the other regular firms. Not only does an interior equilibrium emerge, but two stable equilibria are possible, thus accounting for Italy’s dualism. The 'bad' equilibrium with respect to the 'good' one is in fact characterised by a larger hidden sector, lower levels of overall productivity, output, entrepreneurial ability used, extra-profits, skilled employment, wages, and investment in education, as well as positive externalities; while the negative externalities, which may capture the pressure typically exerted by organised crime, are relatively greater.

Keywords: entrepreneurship, hidden economy, shadow economy, underground economy, matching models

JEL Classification: E26, J23, J24, J63, J64, L26

Suggested Citation

Lisi, Gaetano and Pugno, Maurizio, Entrepreneurship and the Hidden Economy: An Extended Matching Model (July 19, 2009). Available at SSRN: https://ssrn.com/abstract=1436129 or http://dx.doi.org/10.2139/ssrn.1436129

Gaetano Lisi

University of Cassino - Department of Economic Sciences ( email )

Cassino
Italy

Maurizio Pugno (Contact Author)

University of Cassino - Department of Economics and Law ( email )

Campus Folcara
Cassino, Frosinone 03034
Italy

HOME PAGE: http://mauriziopugno.com/en/

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