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Market and underground activities in a two-sector dynamic equilibrium model

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  • Francesco Busato
  • Bruno Chiarini

Abstract

In this paper a two sector dynamic general equilibrium model is developed in order to evaluate the implications of the underground economy from a business cycle perspective. There are three main results. First, introducing an underground sector improves the fit of the model to the data, especially along several important labor market dimensions. Second, the model produces substantial internal propagation of temporary shocks. Third, it is shown that underground activities offer risk sharing opportunities by allowing households to smooth income through a proper labor allocation between the two sectors. Copyright Springer-Verlag Berlin/Heidelberg 2004

Suggested Citation

  • Francesco Busato & Bruno Chiarini, 2004. "Market and underground activities in a two-sector dynamic equilibrium model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 23(4), pages 831-861, May.
    • Handle: RePEc:spr:joecth:v:23:y:2004:i:4:p:831-861
    DOI: 10.1007/s00199-003-0400-5
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