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Size, Trend, and Policy Implications of the Underground Economy

  • Renzo Orsi

    (University of Bologna)

  • Davide Raggi

    (University of Bologna)

  • Francesco Turino

    (University of Alicante)

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)

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File URL: http://dx.doi.org/10.1016/j.red.2013.11.001
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 17 (2014)
Issue (Month): 3 (July)
Pages: 417-436

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Handle: RePEc:red:issued:12-217
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