A0272
Title: Fragility and resilience: Industrial structure under the threat of dimensional traps
Authors: Raffaella Coppier - University of Macerata (Italy) [presenting]
Abstract: Size-dependent fiscal policies are suspected to lead to sub-optimal outcomes in terms of fighting evasion and efficient allocation of investments by firms. A prior study describes how size-dependent tax enforcement may be a source of a dimensional trap in a single-firm evasion model. Their results suggest that, depending on the policy parameters, it may be optimal for the firm not to invest and remain small to face a lower probability of being monitored and punished in case of evasion. The aim is to move to a heterogeneous setting, thus considering industrial structures composed of many firms with different dimensions. When many firms are considered, the consequences of size-dependent policies and potential dimensional traps on the industrial structure and its evolution over time must be studied. A non-deterministic discrete-time dynamic model is proposed. By combining analytical findings and simulation results, it is shown that an unwise choice of policy parameters may determine, in the long run, an industrial structure characterized by a small number of large firms and a plethora of small firms, with the latter being marked by inefficient resource allocation and non-compliant behavior with regard to tax regulations. These results are robust across different choices of the initial industrial structure.
