We propose a theory of firm that is consistent with empirically observed phenomenon of firms simultaneously engaging in both firmal and infirmal activities. firms face endogenous probability of auditing that depends on the scale of underreporting of both sales and wages. We characterize the...

We propose a theory of firm that is consistent with empirically observed phenomenon of firms simultaneously engaging in both formal and informal activities. Firms face endogenous probability of auditing that depends on the scale of underreporting of both sales and wages. We characterize the...