State Aid Policies and Underground Activities

Aarhus University Economics Working Paper No. 10-2005

35 Pages Posted: 17 May 2007

See all articles by Francesco Busato

Francesco Busato

Aarhus University - School of Business and Social Sciences

Bruno Chiarini

University of Naples, Parthenope

Pasquale De Angelis

University of Naples Parthenope

Elisabetta Marzano

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

Date Written: 2006

Abstract

The main goal of this paper is to examine the implications of firm-oriented fiscal policies, such as capital subsidies and tax allowances, in an economy with an underground sector. In addition, we investigate whether the technology structure of "hidden" production may facilitate or counteract the effects of fiscal policies on firm behavior. Among our results we stress the following: first, capital subsidies promote tax evasion; these subsidies induce firms to increase actual capital accumulation (a level effect), but also produce a reduction in the regular share of aggregate capital stock (a composition effect).

Second, tax relief reduces underground activities and fosters capital accumulation, as well as aggregate production. Third, the technology structure matters for determining how to allocate resources between formal and informal production, hence the amount of reported revenues.

Keywords: State aid, capital subsidies, tax evasion, underground production, physical capital accumulation

JEL Classification: E26, E22, H25, H26

Suggested Citation

Busato, Francesco and Chiarini, Bruno and De Angelis, Pasquale and Marzano, Elisabetta, State Aid Policies and Underground Activities (2006). Aarhus University Economics Working Paper No. 10-2005, Available at SSRN: https://ssrn.com/abstract=986282 or http://dx.doi.org/10.2139/ssrn.986282

Francesco Busato

Aarhus University - School of Business and Social Sciences ( email )

Building 350
DK-8000 Aarhus C
Denmark
+45 8942 1133 (Phone)
+45 8613 6334 (Fax)

HOME PAGE: http://www.econ.au.dk/afn

Bruno Chiarini

University of Naples, Parthenope ( email )

Via Generale Parisi 13
Napoli, 80133
Italy

Pasquale De Angelis

University of Naples Parthenope ( email )

Via Amm. F. Acton, 38
80133 Naples, Napoli 80133
Italy

Elisabetta Marzano (Contact Author)

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

via Medina 40
Naples, 80133
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
86
Abstract Views
1,039
rank
354,157
PlumX Metrics