The Underground Economy and the Underdevelopment Trap

Univ. of Trento Economics Department Discussion Paper No. 1

31 Pages Posted: 15 Apr 2002

See all articles by Maurizio Pugno

Maurizio Pugno

University of Cassino - Department of Economics and Law

Maria Rosaria Carillo

University of Naples Parthenope - Department of Economic Studies (DES)

Date Written: March 2002

Abstract

A general equilibrium model is proposed which assumes that firms hire both official and unregistered workers as imperfect substitutes, that entrepreneurs differ in their ability to increase the efficiency of official labour, and that this ability is due to heterogeneous original ability and to Marshallian (non-linear) externalities. In equilibrium, smaller firms hire fewer official workers and are less efficient. If externalities increase sufficiently when firms are numerous, two stable equilibria exist where the number and the size of firms, the proportion of official employment, overall output and efficiency are, respectively, small (the trap) and large. The increase of individual ability due to, e.g., educational policies, has positive effects on the equilibrium number of firms, overall output, and labour regularisation. High and evenly distributed entrepreneurship also make it more likely that increased externalities and penalties on the underground economy will have positive effects. These results may contribute to the current debate on the underground economy in the Southern areas of Italy.

Keywords: Underground economy, shadow economy, underdevelopment trap

JEL Classification: J21, O17

Suggested Citation

Pugno, Maurizio and Carillo, Maria Rosaria, The Underground Economy and the Underdevelopment Trap (March 2002). Univ. of Trento Economics Department Discussion Paper No. 1. Available at SSRN: https://ssrn.com/abstract=305362 or http://dx.doi.org/10.2139/ssrn.305362

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/

Maria Rosaria Carillo

University of Naples Parthenope - Department of Economic Studies (DES) ( email )

via Medina 40
Naples, 80133
Italy

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