Bruno Chiarini 

Research in progress

• Discretionary Policy, Strategic Complementarity and Tax Evasion. A Strategic Analysis of the Italian Audit Mechanism

  Underlying this work is the idea that there is a problem of strategic complementarity of individuals who choose to evade, which results from the discretionary policies of governments and the strategic implications of the Studi di Settore (Sector Studies), the mechanism used in Italy to evaluate the income (in reality, the turnover) of some professional categories and small firms. In the Italian case, policy discretion and the Sector Studies lead to a failure of the coordination mechanism of taxpayers and confer a strong advantage for the coordination mechanism of tax evaders. The outcome is a coordination failure where individuals converge to the least efficient equilibrium from a social perspective.

   

• Was Malthus Right? The Relationship Between Population and Real Wages in Italian History, 1320 to 1870

  In this article we investigate the relation between population and real wages in the Italian economy during the period 1320-1870. The main result is that the positive check is strong and statistically significant but the other equilibrating mechanism in the Malthusian model - the preventive check - based on the positive relationship between fertility and real wages does not operate in pre-industrial Italy. In contrast to the Malthusian hypothesis, we find a negative feedback from wage to population. The empirical result is clearly consistent with the theoretical framework of the “old age security motive”. We show, with a simple overlapping generation model, that by allowing for substitution in a pre-industrial economy between child quantity and other assets (such as new seeds, better soybean quality, and new cultivation and irrigation methods) fertility may be negatively affected whenever income rises.

   

• Why Do Underground Reducing Policies ofen Fail their Scope? Some Answers from the Italian Experience (with M. Di Domizio and E. Marzano), Economics and Politics, Vol. 21, July 2009, pp 308-318.

Several European countries, facing a sizeable underground economy, often adopt underground reducing policies mainly based on incentives in the tax-benefit system. Since empirical evidence manifests a substantial failure of such policies, we construct a simple model to indicate the crucial aspects of this failure. To this end we consider a tax-evading firm, allocating work in the official and underground sector, where it is not taxed. With a view to reducing underground employment, the government may decide to launch an amnesty for past social security non-compliance, whilst providing fiscal incentives for new hiring in order to encourage a process of worker regularization. Allowing for endogenous enforcement, we find that the reputation of policy makers in combating tax evasion proves crucial in determining the success of such a policy.

• Tax Rates and Tax Evasion: an Empirical Analysis of the Structural Aspects and Long-Run Characteristics in Italy (with E. Marzano and  F. Schneider)

  By using official time series of the Italian evaded VAT base (Ministry of Finance) for the period 1980-2004 we investigate empirically the long-run characteristics of tax evasion and the relationship with the tax burden. We focus on three important issues not analyzed so far. First, using different measures of aggregate economic activity as reference variables in estimating the average tax burden, we investigate the size and dynamics of the over-burden traceable back to tax evasion. Second, exploiting cointegration techniques, we quantify the elasticity between tax evasion and the average tax rate in Italy. We then comment on the complex dynamic interaction between tax burden and tax evasion, to ascertain whether in the Italian experience there is evidence for any “vicious circle” between them.

   

• Structural and Cyclical Patterns of Underground Labor Input in Italy (with E. Marzano)

  In this paper we investigated empirically the nature of underground employment in Italy, considering its long-run trend and short-run fluctuations. Our investigation pointed out several interesting regularities. Cyclical behavior of the regular labor input is deeply affected by the aggregate measure of economic activity used as reference variables, i.e. total or market GDP. Second, the cyclical regularities indicate that the resources allocated to the underground economy are mostly motivated by flexibility requirements. Third, the dynamic adjustments of employment between the regular and underground market, are inextricably tied to one another over the cycle. Surprisingly, the relationship between the labor inputs changes with the GDP measure adopted. It may highlight a reallocation mechanism among labor inputs or a labor drag effect

   

• "Evasione fiscale e sommerso economico in Italia: fatti stilizzati, differenze tra periodi, e puzzles" (con E. Marzano), in Moneta e Credito, Vol. LX, n..239 (2007), pp. 259-286. Una versione del lavoro è pubblicata nei Documenti di Discussione dell'Agenzia delle Entrate-Ufficio Studi.

• Equilibrium Implications of Fiscal Policy with Tax Evasion (with F. Busato and G.M. Rey) downloading from the site: University of Aarhus (ftp://ftp.econ.au.dk/afn/wp/05/wp05_04.pdf)
  
  This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. There are three main results. (i) The underground sector mitigates the distortionary impact of fiscal policies, while lessening the drop (rise) of aggregate production after restrictive (expansionary) tax shifts. In this respect, tax evasion and the informal economy offer a channel for insuring income and consumption from distortions generated by fiscal policy. (ii) Tax evasion and underground economy can completely reverse the theoretical predictions of the standard neoclassical growth model and rationalize expansionary responses to contractionary fiscal policies. (iii) A dynamic general equilibrium with tax evasion gives a rational justification for a variant of the Laffer curve.
   

• Interaction between Underground Employment and Unions in Selected  Italian Industries (with E. Marzano), Revue economique, Vol. 60,  September 2009.

   

  In this paper we investigate empirically the nature of the relation between underground employment and unions in Italy, focusing on certain  productive sectors. The motivation for this analysis is the hypothesis  of the existence of two different opposite channels through which  unions affect underground employment: a macro-effect, generating  shadow activities via higher wages and market rigidities; a  micro-effect, entailing a negative impact of trade union power on  underground employment. We consider two different measures of the  bargaining power of trade unions, i.e. wages and net density.  Econometric analysis of Italian data yields three main results. First,  mechanisms of interaction between underground employment and unions  change profoundly according to the nature of the industry. Second, the  two indexes of the trade unions? bargaining power play a different  role vis-à-vis the extent of underground employment. Third, there is a  counter-intuitive interaction between wage and underground employment,  which may be explained in an insider-outsider framework.

   

• Steady State Laffer Curve with the Underground Economy (with F. Busato)

  This paper studies equilibrium effects of fiscal policy within a dynamic general equilibrium model where tax evasion and underground activities are explicitly incorporated. In particular, we show that a dynamic general equilibrium with tax evasion may give a rational justification for a variant of the Laffer curve for a plausible parameterization. In this respect, the paper also identifies the different parameterization of the model formulation with tax evasion under which a Laffer curve exist. From a revenue maximizing perspective, the key policy messages are that bringing tax payers to compliance would be better than announcing to punish them if convicted, and that an economy without problems of compliance is much more sensitive to myopic behavior.
   

• Consumption and income smoothing (with F. Busato and E. Marzano), in Applied Economics, 2008, 40, pp. 2191-2207

This paper presents a two sector dynamic general equilibrium model in which income smoothing takes place within the households (intra-temporally), and consumption smoothing takes place among the households (inter-temporally). Idiosyncratic risk sharing within the family is based on an income smoothing contract. There are two sectors in the model, the regular sector and the underground sector, and the smoothing comes from the underground sector, which is countercyclical with respect aggregate GDP. The paper shows that the simulated disaggregated consumption and income series (that are the regular and underground consumption flows) are more sensitive to exogenous changes in sector-specific productivity and tax rates than regular and underground income flows, and that this picture is reversed when the aggregate series are considered.

• The effectiviness of amnesties in contrasting firms’ tax evasion (with E. Marzano)

In this paper we investigate the effects of temporary amnesties aiming at reducing the underground economy. We consider a tax evading firm operating simultaneously both in the regular and in the underground economy, that is the moonlighting firm. The reputation of policy makers in contrasting the underground economy turns out to be strategic for the success of the intervention. We show that the government’s credibility in rising enforcement is the crucial issue to determine the size of regular production. Moreover, a trade-off arises between regularity and capital accumulation: a credible enforcement program sharply reduces underground production, but it also causes a fall in capital accumulation, while a simple amnesty moderately rise regularity and also spoors capital accumulation.

• Using Theory for Measurement: an Analysis of the Behavior of Underground Economy (with F. Busato and V. Di Maro
  
  The underground economy is, by definition, not directly observable, and the estimates produced by the econometric methods do not pass the basic statistical tests. The main difficulty with the existing approaches to the estimation of the underground economy is that they are generally applicable under very restrictive assumptions; in addition the estimation techniques tend not to be statistically robust, providing a large range of estimates of the phenomenon which strongly changes with small changes in the specification. This paper applies the theoretical methodology, first presented by Ingram, Kocherlota, and Savin (1997) for the household production, for generating non-observable series associated to underground economy. Our analysis predicts an underground productivity cycle more volatile than the official estimates; the correlation between the cyclical component of the underground productivity and the GDP cycle is quite different, since official estimates show a positive correlation with the cyclical component of GDP [0.12] while our model’s series exhibits a negative and stronger correlation [-0.34].

• Capital Subsidies and the Underground Economy (with F. Busato, P. De Angelis and E. Marzano) downloading from the site: University of Aarhus (ftp://ftp.econ.au.dk/afn/wp/05/wp05_10.pdf)

• Tax Shocks, Sunspots and Tax Evasion  (with F. Busato and E. Marchetti), in The Open Economics Journal, 2010, 3, 1-11.

  This paper shows that an increase in corporate/labor/income tax rates may push an economy with tax evasion into an expansionary pattern, under increasing returns to scale. These effects would be reversed when the steady state is saddle-path stable. This model does not undertake a full identification. The interesting feature of our results is that fiscal policy in an economy with a significant underground sector may provide inadvisable outcomes. Thus, tax policies can generate counterproductive results in an economy characterized by existence of aggregate increasing returns to scale and underground activities.
   

• Is Aggregate Labour Demand Asymmetric? A VAR-Model-Based Empirical Investigation (with P. Piselli)., published in "Progress in Economic Research", Vol. 7, 2003, Edit by Albert Tavidze, NOVA Publisher, New York.

  This paper investigates the presence of asymmetry in the adjustment to equilibrium in the Italian labour market. Labour demand in the industrial sector is estimated with an asymmetric error correction model. As firms can adjust labour demand by changing both the number of employees and the degree of utilization of labour force (worked hours), we estimate two different models. There is no evidence of asymmetry both when employment is measured in standard labour units, which take worked hours into account, and when labour input is measured in terms of employees.  In this latter case, however, adjustment costs and the difference between hiring and firing costs, underlying the symmetric adjustment, should emerge more clearly.

   

• Indeterminacy, Underground Activities and Tax Evasion (with F. Busato and E. Marchetti) - downloading from the site: University of Aarhus, Economics Working Paper No. 2004-12

This paper shows that underground activities and tax evasion may be an other possible source of local indeterminacy of the equilibrium path. We derive necessary and sufficient conditions for equilibrium path to be locally indeterminate under tax evasion and underground activities. Moreover, the explicit introduction of an (even small) underground sector into a one-sector general equilibrium model allow to reduce aggregate degree of increasing returns required for indeterminacy, and for having well behaved input demand schedules (in the sense thay slope down). Finally, we show that under indeterminacy, an increase in corporate, labor or income tax rates has a non-Keynesian effect, i.e. the economy enters into an expansionary pattern. These effects are reversed when the steady state is saddle-path stable.

• The Non-Market Sector in Europe and in the United States: Underground Activities and Home Production (with F. Busato), in T.  NAGAKAWA. (ed), Business Fluctuations and Cycles, forthcoming,  NOVA-Publisher, New York, 2007.

This paper suggests that the "home production" and the "underground" sectors are two crucial phenomena for properly understanding the European and the United States business cycles. These sectors spell out the labor reallocation mechanism between market and non-market sectors, and rely upon two important and distinguishing aspects: a different degree of family institutionalization and the incentive for individuals and terms to seek tax-free income. The analysis is fruitfully carried out by reviewing two broad classes of multi-sector dynamic general equilibrium model incorporating different
informal sectors. It is surprising, but the literature on the role of informal sectors in macromodels is not large, although their implications are extremely relevant.

• Dimensione e dinamica dell’economia sommersa: un approfondimento del Currency Demand Approach (with E. Marzano), in Politica Economica, XX, 3, (2004) pp. 303-334.

L’articolo analizza in dettaglio il metodo del currency demand approach, utilizzato per stimare la dimensione dell’economia sommersa. Lo scopo è dimostrare che l’applicazione di questo metodo può risultare ingannevole e che le stime ottenute dai vari autori con tale metodo devono necessariamente essere utilizzate con cautela. Una volta abbandonati semplici specificazioni uniequazionali e le incredibili restrizioni richieste dal metodo, si mostra che i risultati ottenuti non sono validi se si impongono le restrizioni a zero per il calcolo dell’eccesso di liquidità. In ogni caso, le stime rimangono sensibili al periodo iniziale, mentre la dinamica è determinata dalla velocità della moneta.

• Market Consumption and Hidden Consumption. A Test for Substitutability (with E. Marzano) in Applied Economics, 2006, vol. 38, pp. 707-716.

  In this paper we perform the empirical analysis on the relationship between private consumption and underground economy for the Italian case. We find that private market consumption and underground consumption may be defined as "substitutability goods": an increase in underground consumption tends to reduce the family market consumption and increase its marginal utility. An implication of this result is that nonmarket sector o.ers hedging opportunities to the consumer-worker. In economies with sizeable underground sectors, self-insured households adjust consumption to idiosyncratic shocks resorting to the informal market and, therefore, are able to smooth consumption over states of nature. A statistical model confirms this structural interpretation. 
   

• Market and Underground Activities in a Two-Sector Dynamic Equilibrium Model (with F. Busato), published in Economic Theory, 2004, Vol. 23, pp.831-861

  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 o®er risk sharing opportunities by allowing households to smooth income through a proper labor allocation between the two sectors.

• Labour Market and Stochastic Growth Models: Simulations for Italy. A Survey (with F. Busato)

  The dynamic general equilibrium model is one of the dominant macroeconomic framework and one of the most used mode of busimess analysis within the neoclassical thought. This article surveys a great deal of debate and some adjustments used by the literature to force the model’s equilibrium to be Pareto suboptimal, and present a collection of results obtained with real business cycle models constructed and calibrated for the Italian economy, focusing on labour market features. A detailed introduction shows the standard framework defined by Prescott and Merha (1980), while the rest of the paper includes some developments of this scheme applied to the Italian economy, providing simulation results and a comparative assessment of the strengths and weaknesses of the models. Some new recent developments and extensions of the standard framework, particularly interesting for building and simulating artificial economies are discussed at the end of the paper.

  JEL Classification : E30, J00.

  Keywords: Dynamic General Equilibrium Model, Mercato del Lavoro.

   

• Business Cycle, Unemployment Benefits and Productivity Shocks (with P. Piselli)  in Journal of Macroeconomics, 27, (2005) pp. 670-690.

In this paper we examine the conditions under which an economy driven by technological innovations and fiscal shocks capable to affect the return to working, may exhibit recessions. This is accomplished by introducing two features, present in real-world economies, into the standard general setting of the infinite-horizon stochastic growth paradigm: trade union behavior and unemployment benefits. Operating different assumptions on the orthogonality of the stochastic processes, we show that this non-Walrasian economy i) improves the ability to account for the stylized facts, ii) displays realistic features in explaining the employment and productivity puzzles, iii) accounts for contractions.

JEL Classification : E32, D91, J22.

Keywords: Real Business Cycle, Monopoly Union Model, Downturns, Unemployment Benefits.

• A Model of Union Behaviour and Benefits under Uncertainty. Did Thatcher’s Benefits Policy Increase Employment and Reduce Union Power?  (with M. Giannini)

In this paper we emphasise the variability of the unemployment benefit system as a measure of benefit uncertainty and analyse its effects on the labour market. Higher unemployment benefits gives stronger power to the union in collective bargaining over wages. We suppose that a higher uncertainty of the insurance system determined an improvement in the working of the UK labour market and reduced union strength in the 1980s. We investigate these issues with a theoretical stochastic union model of the Kidd-Oswald-Jones’ type, randomising the benefit variable and setting up empirically testable predictions of the model for UK data. The model solution turns out to be confirmed by the data generation process (a VAR model) of the variables involved.