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Market and Underground Activities in a Two-Sector Dynamic Equilibrium Model

Francesco Busato and Bruno Chiarini
Economic Theory
Vol. 23, No. 4 (Jun., 2004), pp. 831-861
Published by: Springer
Stable URL: http://www.jstor.org/stable/25055790
Page Count: 31
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Market and Underground Activities in a Two-Sector Dynamic Equilibrium Model
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Abstract

In this paper a two sector dynamic general equilibrium model is developed in order to evaluate the implications of the underground economy from a business cycle perspective. There are three main results. First, introducing an underground sector improves the fit of the model to the data, especially along several important labor market dimensions. Second, the model produces substantial internal propagation of temporary shocks. Third, it is shown that underground activities offer risk sharing opportunities by allowing households to smooth income through a proper labor allocation between the two sectors.

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