Abstract
This paper presents a theoretical contribution to model and dynamically analyze the underground economy.
We build a quarterly DSGE model for the Italian economy with an homogenous good which can be produced by both a sunlight firm and an underground firm. The sunlight firm is subject to distortionary taxation, whereas the underground firm evades taxation.
The economy is subject to stochastic uncorrelated technology shocks on total factor productivity on private sectors.
The demand side of the economy is populated by an infinite number of households with preferences defined over legal good consumption, public expenditure and labor services on a period-by-period basis.
We simulate the model for the Italian economy over the sample 1974:01–2011:02 analyzing the effects of productivity shocks.
We find that in Italy GDP share of underground economy is on average about 23 %.
The dynamic behavior of the model shows that: (a) sunlight production has a greater relative volatility with respect to underground production, showing a sort of stable “parallel unobserved economic structure” in Italy; (b) all variables of the underground sector appear to be negatively correlated with the corresponding ones of regular economy. This implies that underground activities are a sort of buffer for the economy, whenever the business cycle is in downturn phases.
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Notes
- 1.
Because in each sector there is a perfect competition among the firms, in the long term there are zero dividends as a consequence of the equality between prices and average costs.
- 2.
For the sake of simplicity, we do not consider the share of social security contributions payed by the workers, that in general is much lower than the one payed by the firm.
- 3.
Source: our calculations on ISTAT data.
- 4.
Although we are aware that the probability of being detected in belonging to underground economy is not the same as the probability of being audited, we can refer to this latter information because is the only publicly available as a good proxy of the phenomenon.
- 5.
The model generates time series at a quarterly frequency; after log linear transformation of the series, the trend is computed setting the smoothing parameter to 1600, as the standard value in literature. The cyclical component is obtained as the difference between the actual (raw) series and the computed trend component.
- 6.
Source: ISTAT.
- 7.
Also in this case, private consumption raises but less than in the case of sunlight technology shock.
- 8.
To compare the series with different frequency we empirically convert low frequencies into high frequencies.
- 9.
For 2012 in Italy this value is almost 44 %.
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Acknowledgments
We are especially grateful to Alessandro Piergallini and Barbara Annicchiarico for many conversations and precious advice. We thank specially Luigi Paganetto and the participants of “XXV Villa Mondragone International Economic Seminar” held in Rome in June 2013, for comments on previous versions of the paper. Of course, all errors are ours.
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Argentiero, A., Bollino, C.A. (2014). The Measurement of Underground Economy in Italy. In: Paganetto, L. (eds) Wealth, Income Inequalities, and Demography. Springer, Cham. https://doi.org/10.1007/978-3-319-05909-9_11
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