Abstract
We develop a simple model of an economy with underground production and trade. Because of the furtive nature of underground activities, information about trading opportunities in the irregular sector is less than perfect—hence, agents devote some time to locate trading partners in the black economy and then bargain over the terms of trade. The model stresses how individual involvement in underground economic activities is related to earnings capacity. It also highlights how taxes and tax enforcement are natural policy complements. Both results are argued to be useful when interpreting micro‐ and aggregate‐level data on underground economic activities. (JEL H26, H21, D72, D83)
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