Dealing with Illegal Immigration: the Role of Informality, Taxation and Trade

We develop a two-good, three-sector model of a small open economy with illegal immigration and both formal and informal production. In this framework, we explore the consequences of fiscal policy and trade openness for illegal immigration and the shadow economy. We find that (i) the effect of trade openness on illegal immigration crucially depends on the degree of substitutability between native and illegal labor in the informal sector, (ii) the reach of fiscal policy goes beyond its traditional domain: fiscal instruments can be effectively used as immigration policy tools.