Aarhus University Seal / Aarhus Universitets segl

Capital Subsidies and the Underground Economy

Research output: Working paperResearch

  • Francesco Busato, Denmark
  • Bruno Chiarini, University of Naples Parthenope, Italy
  • Pasquale de Angelis, University of Naples Parthenope, Italy
  • Elisabetta Marzano, University of Naples Parthenope, Italy
  • Afdeling for Nationaløkonomi
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) andAnderberg 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. Wealso 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 suggestthat the allowance of incentives to capital accumulation may generate, in this specifictypology 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 amicroeconomic framework, the evidence of Italian southern regions, where high incentivesare combined with high irregularity ratios.
Original languageEnglish
Place of publicationAarhus
PublisherInstitut for Økonomi, Aarhus Universitet
Number of pages24
Publication statusPublished - 2005

    Research areas

  • evasion, moonlighting, capital subsidies, underground production

See relations at Aarhus University Citationformats

ID: 133880