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Size, Trend, and Policy Implications of the Underground Economy

Author

Listed:
  • Renzo Orsi

    (University of Bologna)

  • Davide Raggi

    (University of Bologna)

  • Francesco Turino

    (University of Alicante)

Abstract

We study the underground economy within a dynamic and stochastic general equilibrium framework. Our model combines limited tax enforcement with an otherwise standard two-sector neoclassical stochastic growth model. The Bayesian estimation of the model based on Italian data provides evidence in favor of an important underground sector in Italy, with a size that has increased steadily over the whole sample period. We show that this pattern is due to a steady increase in taxation. Fiscal policy experiments suggest that a moderate tax cut, along with a stronger effort in the monitoring process, causes a sizeable reduction in the size of the underground economy and provides a positive stimulus for the regular economy. Both of these effects jointly increase total fiscal revenues. (Copyright: Elsevier)

Suggested Citation

  • Renzo Orsi & Davide Raggi & Francesco Turino, 2014. "Size, Trend, and Policy Implications of the Underground Economy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(3), pages 417-436, July.
    • Handle: RePEc:red:issued:12-217
    DOI: 10.1016/j.red.2013.11.001
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    More about this item

    Keywords

    DSGE; Underground economy; Tax evasion; Bayesian estimation; Italy;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

    Statistics

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