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A Matching Model of Endogenous Growth and Underground Firms

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  • Gaetano Lisi
  • Maurizio Pugno

Abstract

A matching model will explain both unemployment and economic growth by considering the underground sector and human capital. Three problems can thus be simultaneously accounted for: (i) the persistence of the underground sector, (ii) the ambiguous relationships between underground employment and unemployment, and (iii) between growth and unemployment. Key assumptions are that entrepreneurial ability is heterogeneous, skill accumulation determines productivity growth, job-seekers choose whether to invest in education. The conclusions are that the least able entrepreneurs, whose number is endogenous, set up underground firms, employ unskilled labour, and do not contribute to growth. If the monitoring rate is sufficiently low, underground employment alleviates unemployment, but the economy grows at lower rates.

Suggested Citation

  • Gaetano Lisi & Maurizio Pugno, 2012. "A Matching Model of Endogenous Growth and Underground Firms," EERI Research Paper Series EERI_RP_2012_03, Economics and Econometrics Research Institute (EERI), Brussels.
    • Handle: RePEc:eei:rpaper:eeri_rp_2012_03
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    1. A Matching Model of Endogenous Growth and Underground Firms
      by Christian Zimmermann in NEP-DGE blog on 2012-02-29 10:38:31

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    More about this item

    Keywords

    Matching models; endogenous growth; underground economy; entrepreneurship; unemployment.;
    All these keywords.

    JEL classification:

    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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