This paper develops a four sector equilibrium search and matching
model with informal sector employment opportunities and educational
choice. We show that underground activities reduce educational at-
tainments if informal employment opportunities mainly are available
to low educated workers. More zealous enforcement policy will in this
case improve educational incentives as it reduces the attractiveness of
remaining a low educated worker. Characterizing the optimal enforce-
ment policies, we nd that relatively more audits should be targeted
towards the sector employing low educated workers, elsewise a too low
stock of educated workers is materialized.
