capital from their adult parents, and consume the licit good. Old individuals do not work, leave a bequest of capital for their o¤spring, and consume the licit good. The volume of illicit income is either consumed or saved by illicit households (young and old) much in the same way as licit households do. An important di¤erence, however, is that a part of illicit income is detected and con...scated by the government with a given probability, while the rest is either consumed or saved. Some of the savings from illicit income are funneled to fund capital investment, which can then be integrated into the licit economy through the bequests from the old to the young.

The last agent in the model is the government, which raises ...scal revenues from both taxes (from licit income) and con...scation proceeds (from illicit activities). It then uses this revenue to produce public goods for all households and to fund a police and judicial system that can detect illicit activities and con...scate their income. We solve the model, showing that it has a short-run equilibrium with illicit activities as well as a steady-state or long-run equilibrium. We perform a set of comparativestatic exercises to explore how changes in key parameters and exogenous variables a¤ect licit and illicit activities, their corresponding income, and key variables like public good provision, social welfare and aggregate savings for an economy.

On the empirical contribution of the paper, we generate estimates of illicit income derived from drug tra¢ cking and from common crime for the early 1980s to the early 2010s in Colombia. This period was characterized by a substantial increase in drug tra¢ cking in the 1980s and 1990s, and a considerable decline after 2000, coinciding with the country’s economic recovery and the implementation of Plan Colombia..Moreover, we use two quantitative methods to estimate the stock of laundered assets in the country’s economy. We ...rst use a calibration method based on a parameterization of the solution equation for laundered assets in the theoretical model. Next, we use a Kalman ...lter method for the estimation of an unobserved variable, which is an innovation in the crime literature.

To implement these quantitative methods, we develop a macroeconometric system of equations that is derived directly from the theoretical model. The system includes two equations: The ...rst one is a transition equation that speci...es the dynamic nature of asset laundering in the economy in terms of its determinants. The second is a measurement equation that represents the mechanisms through which asset laundering a¤ects the stock of physical capital in the economy. The estimable system is applied to data for Colombia in the period 1985 to 2013 in order to estimate the volume of assets and money laundered in this economy. We see our contribution as a ...rst step to measure and quantify these elusive unobservable but relevant variables for any economy.

On a normative perspective, we expect that this study can contribute to improve the country’s regulatory, preventive and anti-criminal systems by providing an economic analysis of the incentives, mechanisms, and e¤ects of illicit activities. Likewise, it can contribute by quantifying the size and e¤ects of illicit income and corresponding money laundering in the economy. Finally, the model and 3