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The Underground Labor Market between Social Norms and Economic Inventives

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Author Info

  • Luigi Bonaventura

    (Department of Labor Studies, University of Milan, Italy)

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.

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File URL: http://128.118.178.162/eps/lab/papers/0501/0501008.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Labor and Demography with number 0501008.

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Length: 12 pages
Date of creation: 18 Jan 2005
Date of revision:
Handle: RePEc:wpa:wuwpla:0501008

Note: Type of Document - pdf; pages: 12
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Web page: http://128.118.178.162

Related research

Keywords: Underground Labor Market; Social Norms; Evolutionary Games; Policy Incentives;

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  1. Huck, Steffen & Kübler, Dorothea & Weibull, Jörgen, 2001. "Social Norms and Optimal Incentives in Firms," Working Paper Series 565, Research Institute of Industrial Economics.
  2. 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.
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