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Entrepreneurship and the Hidden Economy: an Extended Matching Model

  • Gaetano Lisi

    (University of Cassino)

  • Maurizio Pugno

    (University of Cassino)

This paper develops a standard matching model to address the problem of the hidden sector (including non-registered firms but producing for legal markets), as it is characterised in Italy, i.e. framed in a rather advanced economic and institutional setting, but also linked to the socio-economic regional dualism. The main novel features of the model are that entrepreneurial ability is heterogeneous, and that regular firms receive negative externalities from the hidden sector, and positive externalities from the other regular firms. Not only does an interior equilibrium emerge, but two stable equilibria are possible, thus accounting for Italy’s dualism. The “bad” equilibrium with respect to the “good” one is in fact characterised by a larger hidden sector, lower levels of overall productivity, output, entrepreneurial ability used, extra-profits, skilled employment, wages, and investment in education, as well as positive externalities; while the negative externalities, which may capture the pressure typically exerted by organised crime, are relatively greater.

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Paper provided by Universita' di Cassino, Dipartimento di Scienze Economiche in its series Working Papers with number 2009-04.

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Length: 28 pages
Date of creation: Apr 2009
Date of revision:
Handle: RePEc:css:wpaper:2009-04
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