Enforcement of regulation, irregular sector, and firm performance: a computational agent-based model

This paper investigates how enforcement of regulation affects the size of the irregular sector, firm performance and the exit rate to the market. Three kinds of enforcement policy will be tested in the model: control, punish and legitimacy. The first policy is based on the number of inspectors present in the economy; the second is defined by the magnitude of punishment; the third is measured by social legitimacy. Results show the negligible influence of control to fight irregularity; the strong effect of punishment on the irregular sector and on the exit rate; the good effect of legitimacy policy in promoting regularity but low output performance.