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A theoretical model for the underground economy

Domenico Marino: Mediterranea University of Reggio Calabria


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.

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