A THEORETICAL MODEL FOR THE UNDERGROUND ECONOMY

Abstract

A new way of looking at the problem of the underground economy is to consider the productive structure of a regular firm and that of an underground firm, completing the description of the microeconomic behaviour of the agents with the formalization of the behaviour of the state in the presence of regular economy and underground economy. The aim of this work is to build a theoretical model that explains the presence of the underground economy and the reasons for the cyclical pattern of its impact. We also propose a fuzzy estimation of value of elasticity of the 'quantity' of the underground economy in relationship to its cost (sanction). From a policy standpoint, it would be necessary to identify an optimal level of public expense in investing in prevention and safety in the underground economy, which is capable of making the additional cost for the company that uses irregular work greater than the cost for the company that does not use it. The state, in fact, plays a crucial role since it can reduce or eliminate competitive advantage by imposing a sanction that nullifies the advantage of the underground company.Keywords: underground economy,agent behaviourJEL Classification: E26(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONThe aim of this work is to build a theoretical model that explains the presence of the underground economy and the reasons for the cyclical pattern of its impact. A new way of looking at the problem of the underground economy is to consider the productive structure of a regular firm and an underground ('informal') firm, completing the description of the microeconomic behaviour of the agents with the formalization of the behaviour of the state in the presence of the regular economy and the underground economy.In particular, in our model the firms perceive the intervention of the state as linked to the possible cost configurations of the regular and underground firms.Predictably, the costs of a firm that uses irregular work, or that remains underground, will seem to be less than for regular work, while the perception of the risk of sanctions for its behaviour will become a fundamental element of the choice made by the firm. It will obviously be the inefficiency of identifying behaviours linked to the informal economy or the greater propensity for risk of the businessman or the fact that he estimates the expected costs deriving from activities to prevent and sanction his activities to be low that determines a possible 'competitive advantage' of the underground economy over the regular one.It has been said that operators in the regular economy choose to conduct their activities using real resources and having objective functions in which the risk of a sanction is not contemplated (they have no reason to acquire a 'figurative' productive factor to use at the time when they are sanctioned, such as, for example, a bribe to not be prosecuted for a crime). Underground operators choose to conduct irregular activities and to assume the risk of a sanction due to this. The cost differential that arises from the irregular behaviour (which, as we said, reflects a lower overall cost of production) can potentially be 'covered' by a greater cost for the acquisition of a 'figurative' production factor as a consequence of more efficient state action to combat the underground economy.The theoretical work presented in this paper is part of the broader literature on the illegal behaviour of firms. To the traditional 'Beckerian' approach that, for some time, has constituted the 'mainstream' approach to these subjects, in both the classic (Becker, 1968) and more advanced versions (such as Schmidt and Witte, 1984), there has now been added the 'strategic-structural' approach (Schelling, 1984), which has more strictly posed the problem of the criminal organization, its internal structure and the strategic interaction inside 'gangs' and the relationship between the state and the subjects of the illegal economy (Marino and Timpano, 1997). …