Capital Subsidies and the Underground Economy

Aarhus University Economics Paper No. 2005-10

27 Pages Posted: 18 Jun 2008

See all articles by Francesco Busato

Francesco Busato

Aarhus University - School of Business and Social Sciences

Bruno Chiarini

University of Naples, Parthenope

Pasquale De Angelis

University of Naples Parthenope

Elisabetta Marzano

University of Naples Parthenope - Department of Economic Studies (DES)

Date Written: November 10, 2005

Abstract

In this paper we investigate the effects of different fiscal policies on the firm choice to produce underground. We consider a tax evading firm operating simultaneously both in the regular and in the underground economy. We suggest that such a kind of firm, referred to as moonlighting firm, is able to offset the specific costs usually stressed by literature on underground production, such as those suggested by Loayza (1994) and Anderberg et al. (2003). Investigating the effects of different fiscal policy interventions, we find that taxation is a critical parameter to define the size of capital allocation in the underground production. In fact, a strong and inverse relationship is found, and tax reduction is the best policy to reduce the convenience to produce underground. We also confirm the depressing effect on investment of taxation (see, for instance, Summers, 1981), so that tax reduction has no cost in terms of investment. By contrast, the model states that while enforcement is an effective tool to reduce capital allocation in the underground production, it also reduce the total capital stock. Moreover, we also suggest that the allowance of incentives to capital accumulation may generate, in this specific typology of firm, some unexpected effects, causing, together with a positive investment process, also an increase in the share of irregularity. This finding could explain, in a microeconomic framework, the evidence of Italian southern regions, where high incentives are combined with high irregularity ratios.

Keywords: evasion, moonlighting, capital subsidies, underground production

JEL Classification: E26, E22, H25, H26

Suggested Citation

Busato, Francesco and Chiarini, Bruno and De Angelis, Pasquale and Marzano, Elisabetta, Capital Subsidies and the Underground Economy (November 10, 2005). Aarhus University Economics Paper No. 2005-10, Available at SSRN: https://ssrn.com/abstract=1147606 or http://dx.doi.org/10.2139/ssrn.1147606

Francesco Busato (Contact Author)

Aarhus University - School of Business and Social Sciences ( email )

Building 350
DK-8000 Aarhus C
Denmark
+45 8942 1133 (Phone)
+45 8613 6334 (Fax)

HOME PAGE: http://www.econ.au.dk/afn

Bruno Chiarini

University of Naples, Parthenope ( email )

Via Generale Parisi 13
Napoli, 80133
Italy

Pasquale De Angelis

University of Naples Parthenope ( email )

Via Amm. F. Acton, 38
80133 Naples, Napoli 80133
Italy

Elisabetta Marzano

University of Naples Parthenope - Department of Economic Studies (DES) ( email )

via Medina 40
Naples, 80133
Italy

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
47
Abstract Views
643
PlumX Metrics