THE DILEMMA OF INFORMALITY AND HOW TO COMBAT IT
DOI:
https://doi.org/10.37135/kai.003.02.01Keywords:
Informal Economy, Prisoner's Dilemma, Nash Equilibrium, Public Policy DesignAbstract
Informality is one of the main obstacles to the economic development of countries, as their productivity decreases. Despite this, informality represents an attractive option for any productive agent due to the immediate benefits it generates; for example, higher income due to tax evasion. However, the impact of informality on the entire economy is negative. The present study analyzes the interaction between government and companies based on the prisoner's dilemma, in which it is observed that being informal is an equilibrium strategy. This game allows us to establish different public policy options to combat informality. We particularly analyze the impact that the imposition of subsidies and the generation of externalities have on the formalization of productive agents and on government.
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