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Entrepreneurship and the Hidden Economy: An Extended Matching Model

  • Pugno, Maurizio
  • Lisi, Gaetano

This paper develops a labour market matching model in order to address the problem of the persistence of the hidden sector and of its regional concentration, as in Italy and in the enlarged Europe. The main novel features of the model are that entrepreneurial ability affects job productivity, and that regular firms receive negative externalities from the hidden sector, which may capture the pressure typically exerted by corruption and organized crime, and positive externalities from the other regular firms. At least one interior equilibrium emerges, thus providing an explanation for the so-called “shadow puzzle”, with the possibility that tougher monitoring may reduce both the hidden sector and unemployment. If externalities are non-linear, two equilibria may emerge, thus accounting for regional dualism. The “better” equilibrium is in fact characterised by a smaller hidden sector, higher levels of overall productivity, output, entrepreneurial ability used, extra-profits, relative wages, and more favourable externalities.

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File URL: https://mpra.ub.uni-muenchen.de/25301/1/MPRA_paper_25301.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 25301.

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Date of creation: 20 May 2010
Handle: RePEc:pra:mprapa:25301
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  1. Kolm, Ann-Sofie & Larsen, Birthe, 2001. "Wages, Unemployment, and the Underground Economy," Working Paper Series 2001:8, Uppsala University, Department of Economics.
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