Measuring the Shadow Economy: Endogenous Switching Regression with Unobserved Separation

31 Pages Posted: 9 Mar 2015

See all articles by Randall K. Filer

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)

Jan Hanousek

CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute); Charles University in Prague; Academy of Sciences of the Czech Republic; Centre for Economic Policy Research (CEPR)

Tomas Lichard

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

Multiple version iconThere are 3 versions of this paper

Date Written: March 2015

Abstract

We develop an estimator of unreported income that relies on much more flexible identifying assumptions than those underlying previous estimators of the shadow economy using household-level data. Assuming only that evading households have a higher consumption-income gap than non-evaders in surveys, an endogenous switching model with unknown sample separation enables the estimation of both the probability of hiding income and the expected amount of unreported income for each household. Using data from Czech and Slovak household budget surveys, we find the size of the shadow economy to be substantially larger than estimated using other techniques. These results are robust under a number of alternative specifications.

Keywords: consumption-income gap, tax evasion, underreporting

JEL Classification: H26, J46, O17

Suggested Citation

Filer, Randall K. and Hanousek, Jan and Lichard, Tomas, Measuring the Shadow Economy: Endogenous Switching Regression with Unobserved Separation (March 2015). CEPR Discussion Paper No. DP10483, Available at SSRN: https://ssrn.com/abstract=2575787

Randall K. Filer (Contact Author)

City University of New York, CUNY Hunter College - Department of Economics ( email )

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University of Michigan at Ann Arbor - The William Davidson Institute

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CESifo (Center for Economic Studies and Ifo Institute)

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Jan Hanousek

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

Politickych veznu 7
Prague 1, 111 21
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420 2 2421 1374 (Fax)

HOME PAGE: http://www.cerge-ei.cz

Charles University in Prague ( email )

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Praha 1, 116 36
Czech Republic

Academy of Sciences of the Czech Republic ( email )

Narodni 3, 111 42
Praha 1, 117 20
Czech Republic

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tomas Lichard

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

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