The Underground Labor Market between Social Norms and Economic Inventives
Abstract– This paper examines the phenomenon of the underground economy. We analyze the choice by firms and workers to carry out their economic activities within the formal economy context (regular economy) or the underground economy context (irregular economy). We assume that there are two types of labor markets, a regular one, and a irregular one; and starting from a coordinated interaction between the firm and the worker we show the existence of multiple symmetric equilibria in each market. The proposed game of coordination (2x2), can be interpreted as a pre-contract interaction between the agents through which they determine in which labor market they will “meet”. In the model, we insert an exogenous policy parameter (t) that measures the impact of legislative policy interventions on the regular labor market. The parameter takes on a positive value with respect to those interventions that increase the incentives to operate in the regular market. Through the utilization of evolutionary dynamics we can explicate the mechanism that leads the system towards one of the two equilibria, and explain the fact that these equilibria are sustained among the different populations (firms and workers) by taking on the role of a social norm. In this framework, we show that policy interventions (t) do not alter the choice dynamics of each actor, nor do they eliminate the probability of having certain dynamics that push the system towards the underground market, even where there are strong incentives for acting in the regular economy.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by EconWPA in its series Labor and Demography with number 0501008.
Length: 12 pages
Date of creation: 18 Jan 2005
Date of revision:
Note: Type of Document - pdf; pages: 12
Contact details of provider:
Web page: http://126.96.36.199
Underground Labor Market; Social Norms; Evolutionary Games; Policy Incentives;
Find related papers by JEL classification:
- J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts
- J42 - Labor and Demographic Economics - - Particular Labor Markets - - - Monopsony; Segmented Labor Markets
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-01-23 (All new papers)
- NEP-CWA-2005-01-23 (Central & Western Asia)
- NEP-REG-2005-01-23 (Regulation)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Huck, Steffen & Kübler, Dorothea & Weibull, Jörgen, 2001.
"Social Norms and Optimal Incentives in Firms,"
Working Paper Series
565, Research Institute of Industrial Economics.
- S. Huck & D. Kübler & J. Weibull, 2002. "Social norms and optimal incentives in firms," SFB 373 Discussion Papers 2002,11, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Huck, Steffen & Kübler, Dorothea & Weibull, Jörgen, 2001. "Social norms and optimal incentives in firms," Working Paper Series in Economics and Finance 466, Stockholm School of Economics.
- Akerlof, George A, 1980.
"A Theory of Social Custom, of Which Unemployment May be One Consequence,"
The Quarterly Journal of Economics,
MIT Press, vol. 94(4), pages 749-75, June.
- George A. Akerlof, 1978. "A theory of social custom, of which unemployment may be one consequence," Special Studies Papers 118, Board of Governors of the Federal Reserve System (U.S.).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.