The network effect the researchers detect stems from the fact that workers in the underground economy have access to better and more timely information on the availability of underground commodities. This reduces their search costs and may therefore induce them to spend more on underground goods and services. The results are based on a unique randomised survey conducted in Canada in 1994. The term 'underground' refers to activities that generate income that is not reported to the tax authorities. The more educated have a higher propensity to purchase underground commodities.
Men are more likely to purchase underground commodities than women.
The study also highlights the policy implications of these results. In the presence of this effect, the demand and the supply for underground commodities are simultaneously affected by changes in enforcement. Hence, more stringent enforcement policies may lead workers to reduce their hours in the underground sector as well as their expenditure on underground commodities. Omission of this demand effect thus results in significant underestimation when assessing the impact of tax and enforcement policies on the size of the sector.