Academic journal article Fuzzy Economic Review

A Theoretical Model for the Underground Economy

Academic journal article Fuzzy Economic Review

A Theoretical Model for the Underground Economy

Article excerpt

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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. 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). The contribution of the latter thread has been important both at the descriptive level and in relation to possible implications for economic policy.


The underground economy is a problem not only from an economic standpoint, but also, and especially, from a social perspective since its effects are reflected in the workers' private lives, causing them problems and also often upsetting their psychological balance. Consequently, the reduction of the irregular economy and labour becomes one of the main objectives of labour policies.

Undeclared employment and the irregular economy are an indicator of inefficient use of production factors, of tax and social security contribution evasion and, ultimately, of economic and social hardship.

Consider also that in many European regions, the phenomenon shows obvious structural characteristics; in other words, it has persisted for several decades, despite the fact that in other regions it is more a cyclical phenomenon or a phenomenon that shows a tendency to significant reduction (Meldolesi, 2000, 2001; Schneider, 1998). …

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