Influence of a shadow sector of economy on heterogeneous agent behavior

Abstract

The influence of the shadow, informal and household sectors that produce goods for own consumption on the dynamics of a stochastic model with heterogeneous agents is considered. The general equilibrium approach that explains the behavior of demand, supply and prices in economy with several interactive markets is used in the study. The model under consideration describes an economy with aggregated uncertainty and with an infinite number of heterogeneous agents (households). The source of heterogeneity is the idiosyncratic shocks of agents' incomes in the legal and shadow sectors of economy. The presence of two sectors of the economy (legal and shadow) leads, respectively, to two sources of heterogeneity associated with the individual distribution of household income in these sectors. In the analysis an approximation algorithm of the dynamics of capital supply functions of individual agents – the dynamics of its first and second moments is used. The parameters of the model are estimated by the Bayesian method in the case study of the empirical data of Russian economy. An important fact is that the likelihood function of the model with heterogeneous agents is more important than the analogous model for the model with representative agents, i. e. the model under consideration describes the empirical data of Russian economy more adequately. The behavior of the impulse response functions of the basic variables of the model confirms the positive influence of the shadow economy (below a certain limit) on minimizing the rates of decline in economic indicators during recessions, especially for developing economies. The original result is that when analyzing the dynamics of aggregated variables in the model under consideration with two sources of heterogeneity, it is necessary to take into account not only the first-order moments of the distribution function of capital stocks, but also second-order moments. The further prospects of research can be connected to the application of more detailed models of the general (common) balance allowing, in particular, to describe also behavior of non-uniform groups of agents of enterprise sector of economy.

Keywords

heterogeneous agents, expectations, idiosyncratic shocks, aggregated uncertainty, shadow economy, informal sector of economy, legal sector of economy, household sector, Bayesian method, general economic equilibrium.

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