This paper builds a theory that explains the dramatic expansion of the underground economy in the late 1990s by the sharp increase in market competition worldwide. I model an oligopoly game where firms first decide on entry and sector, and then compete in price. Operating in the underground sector reduces variable costs, but comes at the risk of being detected and fined. As competition intensifies (i.e. as consumers become more and more price-sensitive), underground firms attract more demand, thus stealing business and profits from official firms. As a consequence, more firms enter the underground economy. A lenient policy toward the underground economy may increase welfare when mark-ups are high, but will be welfare detrimental when mark-ups are low.

The "dark side" of deregulation: how competition affects the size of the shadow economy / GIARDINO-KARLINGER, Liliane. - In: JOURNAL OF PUBLIC ECONOMIC THEORY. - ISSN 1097-3923. - 16:2(2014), pp. 293-321. [10.1111/jpet.12053]

The "dark side" of deregulation: how competition affects the size of the shadow economy

GIARDINO-KARLINGER, LILIANE
2014

Abstract

This paper builds a theory that explains the dramatic expansion of the underground economy in the late 1990s by the sharp increase in market competition worldwide. I model an oligopoly game where firms first decide on entry and sector, and then compete in price. Operating in the underground sector reduces variable costs, but comes at the risk of being detected and fined. As competition intensifies (i.e. as consumers become more and more price-sensitive), underground firms attract more demand, thus stealing business and profits from official firms. As a consequence, more firms enter the underground economy. A lenient policy toward the underground economy may increase welfare when mark-ups are high, but will be welfare detrimental when mark-ups are low.
Shadow Economy; Tax Evasion; Deregulation
The "dark side" of deregulation: how competition affects the size of the shadow economy / GIARDINO-KARLINGER, Liliane. - In: JOURNAL OF PUBLIC ECONOMIC THEORY. - ISSN 1097-3923. - 16:2(2014), pp. 293-321. [10.1111/jpet.12053]
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/36075
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