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State Aid Policies and Underground Activities

  • Bruno Chiarini
  • Elisabetta Marzano
  • Francesco Busato
  • Pasquale De Angelis

The main goal of this paper is to examine the implications of firm-oriented fiscal policies, such as capital subsidies and tax allowances, in an economy with an underground sector. In addition, we investigate whether the technology structure of “hidden” production may facilitate or counteract the effects of fiscal policies on firm behavior. Among our results we stress the following: first, capital subsidies promote tax evasion; these subsidies induce firms to increase actual capital accumulation (a level effect), but also produce a reduction in the regular share of aggregate capital stock (a composition effect). Second, tax relief reduces underground activities and fosters capital accumulation, as well as aggregate production. Third, the technology structure matters for determining how to allocate resources between formal and informal production, hence the amount of reported revenues.

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Paper provided by D.E.S. (Department of Economic Studies), University of Naples "Parthenope", Italy in its series Discussion Papers with number 4_2007.

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Date of creation: 01 Apr 2007
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Handle: RePEc:prt:dpaper:4_2007
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  15. Pellegrini Guido & Carlucci Carla, 2003. "Gli effetti della legge 488/92: una valutazione dell'impatto occupazionale sulle imprese agevolate," Rivista italiana degli economisti, Società editrice il Mulino, issue 2, pages 267-286.
  16. Hibbs Jr., Douglas A. & Piculescu, Violeta, 2005. "Tax Toleration and Tax Compliance: How Government Affects the Propensity of Firms to Enter the Uno¢ cial Economy," Working Papers in Economics 173, University of Gothenburg, Department of Economics, revised 12 Jun 2006.
  17. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  18. Loayza, Norman A., 1997. "The economics of the informal sector : a simple model and some empirical evidence from Latin America," Policy Research Working Paper Series 1727, The World Bank.
  19. Francesco Busato & Bruno Chiarini, 2004. "Market and underground activities in a two-sector dynamic equilibrium model," Economic Theory, Springer, vol. 23(4), pages 831-861, May.
  20. Rainer Nitsche & Paul Heidhues, 2006. "Study on methods to analyse the impact of state aid on competition," European Economy - Economic Papers 244, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  21. Alm, James, 1985. "The Welfare Cost of the Underground Economy," Economic Inquiry, Western Economic Association International, vol. 23(2), pages 243-63, April.
  22. Tito Boeri & Pietro Garibaldi, . "Shadow Activity and Unemployment in a Depressed Labor Market," Working Papers 177, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  23. Loayza, Norman V., 1994. "Labor regulations and the informal economy," Policy Research Working Paper Series 1335, The World Bank.
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