Moonlighting Production, Tax Rates and Capital Subsidies

8 Pages Posted: 4 Apr 2011

See all articles by Francesco Busato

Francesco Busato

University of Naples Parthenope

Bruno Chiarini

University of Naples, Parthenope

Elisabetta Marzano

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

Date Written: March 31, 2011

Abstract

Informal firms play a crucial role in both developing and developed countries, and there is evidence of a larger presence of moonlighting firms over ghost firms. The former are firms that operate simultaneously in the official and unofficial sectors, whereas the ghost firms undertake their production only underground. In order to deal with this evidence, through an ad-hoc assumption we represent a specific technological advantage of moonlighting firms over ghost firms, modelled through an aggregate-capital externality. In this setting we examine the steady state effect of fiscal policies aimed to support firms, in particular investment subsidies and tax allowances, on firm size and underground production. Among the main results, a tax cut (rise), induces the moonlighting firm to engage in more (less) official production. Contrary to the presumption that subsidies may also be useful for pushing firms to operate over ground, in the presence of moonlighting technology, the incentives to improve capital stock turn out to be counterproductive in that they increase the unofficial economy overall.

Keywords: formal and informal sectors, capital investment, tax exemptions

JEL Classification: E260

Suggested Citation

Busato, Francesco and Chiarini, Bruno and Marzano, Elisabetta, Moonlighting Production, Tax Rates and Capital Subsidies (March 31, 2011). CESifo Working Paper Series No. 3401, Available at SSRN: https://ssrn.com/abstract=1802383

Francesco Busato

University of Naples Parthenope ( email )

Via Medina 40
Via Generale Parisi, 13
Naples, 80133
Italy

Bruno Chiarini

University of Naples, Parthenope ( email )

Via Generale Parisi 13
Napoli, 80133
Italy

Elisabetta Marzano (Contact Author)

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

via Medina 40
Naples, 80133
Italy

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