Optimal taxation and monitoring in an economy with matching frictions and underground activities

Abstract

This short paper shows the interdependence of taxation and monitoring policy in a search and matching model of equilibrium unemployment with an underground sector. More precisely, from a social welfare standpoint, two options are available to the policy maker: she/he may either substitute a tighter monitoring with a higher penalty or enforce both a higher taxation and an increased monitoring.

Keywords

• optimal taxation
• tax evasion
• underground economy
• job search