THE UNDERGROUND ECONOMY AND THE strongUNDERDEVELOPMENTstrong TRAP.pdfVIP

UNIVERSITA DEGLI STUDI DI TRENTO DIPARTIMENTO DI ECONOMIA _____________________________________________________________________________ THE UNDERGROUND ECONOMY AND THE UNDERDEVELOPMENT TRAP Maria Rosaria Carillo and Maurizio Pugno _________________________________________________________ Discussion Paper No. 1, 2002 1 The Discussion Paper series provides a means for circulating preliminary research results by staff of or visitors to the Department. Its purpose is to stimulate discussion prior to the publication of papers. Requests for copies of Discussion Papers and address changes should be sent to: Prof. Andrea Leonardi Dipartimento di Economia Università degli Studi Via Inama 5 38100 TRENTO ITALY 2 March 2002 THE UNDERGROUND ECONOMY * AND THE UNDERDEVELOPMENT TRAP by Maria Rosaria Carillo♣ and Maurizio Pugno♠ Abstract. A general equilibrium model is proposed which assumes that firms hire both official and unregistered workers as imperfect substitutes, that entrepreneurs differ in their ability to increase the efficiency of official labour, and that this ability is due to heterogeneous original ability and to Marshallian (non-linear) externalities. In equilibrium, smaller firms hire fewer official workers and are less efficient. If externalities increas