() and Ann-Sofie Kolm
Birthe Larsen: Department of Economics, Copenhagen Business School, Postal: Department of Economics, Copenhagen Business School, Porcelænshaven 16 A, 1, DK-2000 Frederiksberg, Denmark
Ann-Sofie Kolm: Department of Economics, Stockholm University
Abstract: This paper develops a general equilibrium search and matching model where an underground economy co-exists along with the formal part of the economy. In analyzing how tax and punishment policies a¤ect labour market performance, we nd that punishment of infor- mal sector activities induce workers and rms to reallocate towards the formal sector. However, more importantly, we nd that this real- location tends to improve e¢ ciency in search, reduce the overall wage pressure, and reduce actual unemployment.
18 pages, May 28, 2010
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