Abstract

http://ssrn.com/abstract=2161238
 


 



Measuring the Shadow Economy: Endogenous Switching Regression with Unobserved Separation


Tomas Lichard


Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Jan Hanousek


CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Randall K. Filer


City University of New York, CUNY Hunter College - Department of Economics; Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute); University of Michigan at Ann Arbor - The William Davidson Institute; CESifo (Center for Economic Studies and Ifo Institute)

October 13, 2012

IZA Discussion Paper No. 6901

Abstract:     
We develop an estimator of unreported income, perhaps due to tax evasion, that does not depend on as strict identifying assumptions as previous estimators based on microeconomic data. The standard identifying assumption that the self-employed underreport income whereas wage and salary workers do not is likely to fail in countries where employees are often paid under the table or engage in corrupt activities. Assuming that evading individuals have a higher consumption-income gap than non-evading ones due underreporting both to tax authorities and in surveys, an endogenous switching model with unknown sample separation enables the estimation of consumption-income gaps for both underreporting and truthful households. This avoids the need to identify non-evading and evading groups ex-ante. This methodology is applied to data from Czech and Slovak household budget surveys and shows that estimated evasion is substantially higher than found using previous methodologies.

Number of Pages in PDF File: 22

Keywords: shadow economy, switch regression, income-consumption gap

JEL Classification: C34, E01, H26, J39

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Date posted: October 13, 2012  

Suggested Citation

Lichard, Tomas and Hanousek, Jan and Filer, Randall K., Measuring the Shadow Economy: Endogenous Switching Regression with Unobserved Separation (October 13, 2012). IZA Discussion Paper No. 6901. Available at SSRN: http://ssrn.com/abstract=2161238

Contact Information

Tomas Lichard (Contact Author)
Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )
P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic
HOME PAGE: http://www.cerge-ei.cz
Jan Hanousek
CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )
Politickych veznu 7
Prague 1, 111 21
Czech Republic
420 2 2400 5119 (Phone)
420 2 2421 1374 (Fax)
HOME PAGE: http://www.cerge-ei.cz
Randall K. Filer
City University of New York, CUNY Hunter College - Department of Economics ( email )
695 Park Avenue
Hunter West 1502
New York, NY 10021
United States
212-772-5499 (Phone)
HOME PAGE: http://econ.hunter.cuny.edu/faculty/filer/
Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )
P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic
42 02 240 05 213 (Phone)
42 02 242 27 143 (Fax)
HOME PAGE: http://www.cerge-ei.cz
University of Michigan at Ann Arbor - The William Davidson Institute
724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Feedback to SSRN


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