This is a note on corruption and underground economy in a Kaldor-type model of the business cycle. It appears that when the economy is booming and underground activities seek to enter the official economy, bureaucrats have the upper hand but until underground businesses cannot tolerate...

A model is presented in which one firm borrows from one bank with a positive supply curve of loans. The bank monitors firm's output, which firm produces output underground too, in order to avoid this monitoring and minimize its marginal expenditure on loans by defaulting. The model incorporates...