Moonlighting Production, Tax Rates and Capital Subsidies
AbstractInformal firms play a crucial role in both developing and developed countries, and there is evidence of a larger presence of moonlighting firms over ghost firms. The former are firms that operate simultaneously in the official and unofficial sectors, whereas the ghost firms undertake their production only underground. In order to deal with this evidence, through an ad-hoc assumption we represent a specific technological advantage of moonlighting firms over ghost firms, modelled through an aggregate-capital externality. In this setting we examine the steady state effect of fiscal policies aimed to support firms, in particular investment subsidies and tax allowances, on firm size and underground production. Among the main results, a tax cut (rise), induces the moonlighting firm to engage in more (less) official production. Contrary to the presumption that subsidies may also be useful for pushing firms to operate over ground, in the presence of moonlighting technology, the incentives to improve capital stock turn out to be counterproductive in that they increase the unofficial economy overall.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3401.
Date of creation: 2011
Date of revision:
formal and informal sectors; capital investment; tax exemptions;
Find related papers by JEL classification:
- E26 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
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- Sarte, Pierre-Daniel G., 2000.
"Informality and rent-seeking bureaucracies in a model of long-run growth,"
Journal of Monetary Economics,
Elsevier, vol. 46(1), pages 173-197, August.
- Pierre-Daniel G. Sarte, 1999. "Informality and rent-seeking bureaucracies in a model of long-run growth," Working Paper 99-07, Federal Reserve Bank of Richmond.
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