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Indeterminacy, Underground Activities and Tax Evasion

  • Francesco Busato
  • Bruno Charini
  • Enrico Marchetti

    ()

    (Department of Economics, University of Aarhus, Denmark)

This paper introduces underground activities and tax evasion into a one sector dynamic general equilibrium model with external effects. The model presents a novel mechanism driving the self-fulfilling prophecies, which is triggered by the reallocation of resources to the underground sector to avoid the excess tax burden. This mechanism differs from the customary one, and it is complementary to it. In addition, the explicit introduction of an (even tiny) underground sector allows to reduce the aggregate degree of increasing returns required for indeterminacy, and for having well behaved input demand schedules (in the sense they slope down).

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File URL: ftp://ftp.econ.au.dk/afn/wp/04/wp04_12.pdf
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Paper provided by Department of Economics and Business Economics, Aarhus University in its series Economics Working Papers with number 2004-12.

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Length: 29
Date of creation: 21 Nov 2004
Date of revision:
Handle: RePEc:aah:aarhec:2004-12
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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