Market consumption and hidden consumption. A test for substitutability

Abstract

In this paper an empirical analysis is performed on the relationship between private consumption and underground economy for the Italian case. It is found that private market consumption and underground (or hidden) consumption may be defined as ‘complementary goods’: an increase in underground consumption tends to increase family market consumption and increase its marginal utility. An implication of this result is that the nonmarket sector does not offer hedging opportunities to the consumer-worker as stressed by Busato and Chiarini's (2004) artificial economy. Moreover, wealth effects associated with a change in underground consumption are negative. A statistical model confirms this structural interpretation.

Consumption and income smoothing

“…Lemma 2 (Firms) Firms are characterized by a production function, and a cost function. (10) in the text.…”

“…Gallie and Paugam, 2000). 10 We will see that, given the structure of our income smoothing contract, we may rewrite the heterogeneous agent model as a representative agent model. This claim is proved in Proposition 1.…”

“…we cannot short sell H hours worked in one the sector), consumption would follow approximately income dynamic. Chiarini and Marzano (2006) examine the relationship between market and underground consumption profiles in Italy using econometric techniques in a partial equilibrium framework. Their empirical estimates suggest that the two forms of consumption are complements, so implying that when underground consumption rises, marginal utility of the market consumption rises too.…”