Abstract
Both theoretical and empirical studies which do not take into account the existence of unrecorded economy may not provide a complete insight on the effects of fiscal and environmental enforcement policies in developing countries, where unrecorded economic activities have an important weight. This study attempts to fill that void. Two different cases are considered: first, firms’ production and emissions are audited with different exogenous probabilities; second, a unique probability-to-audit function is determined to audit both emission and production levels of firms, whether in recorded or unrecorded economy. The paper determines the conditions under which environmental regulations may increase the size of unrecorded economy.
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