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Tax Morale, Entrepreneurship, and the Irregular Economy

  • Gaetano Lisi

    (University of Cassino)

  • Maurizio Pugno

    (University of Cassino)

This paper incorporates tax morale into a search and matching model of equilibrium unemployment, with on-the-job search, extended to both the irregular sector and entrepreneurship. Tax morale is modelled as a social norm for tax compliance which renders evasion costly. The moral cost of tax evasion (the strength of the social norm) is negatively related to the fraction of entrepreneurs that evades taxes. Precisely, if the relationship is nonlinear, multiple equilibria may emerge, thus accounting for differences in-between regions and countries in the size of the irregular sector. The "good" equilibrium is in fact characterised, with respect to the "bad" one, by a smaller irregular sector and a stronger tax morale.

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Paper provided by Universita' di Cassino, Dipartimento di Scienze Economiche in its series Working Papers with number 2011-01.

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Length: 20 pages
Date of creation: 18 Jan 2011
Date of revision:
Handle: RePEc:css:wpaper:2011-01
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