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Hidden in plain sight: using household data to measure the shadow economy

Author

Listed:
  • Tomáš Lichard

    (University of Economics
    CERGE-EI)

  • Jan Hanousek

    (CERGE-EI
    CEPR, Center for Economic Policy Research)

  • Randall K. Filer

    (CERGE-EI
    Hunter College and The Graduate Center, CUNY
    IZA
    CESifo)

Abstract

We develop an estimator of unreported income that relies on more flexible identifying assumptions than those that have been used previously. Assuming only that evaders have a higher consumption–income gap than non-evaders in surveys, our model enables the estimation of both the probability of hiding income and the amount of unreported income for each household. We illustrate the method using Czech and Slovak household budget surveys. Our results are robust to alternative specifications. Furthermore, we show that since the underreported share decreases with reported income, income inequality in these countries may be lower than suggested by the reported income.

Suggested Citation

  • Tomáš Lichard & Jan Hanousek & Randall K. Filer, 2021. "Hidden in plain sight: using household data to measure the shadow economy," Empirical Economics, Springer, vol. 60(3), pages 1449-1476, March.
    • Handle: RePEc:spr:empeco:v:60:y:2021:i:3:d:10.1007_s00181-019-01797-z
    DOI: 10.1007/s00181-019-01797-z
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    Cited by:

    1. Colin C. Williams, 2023. "A Modern Guide to the Informal Economy," Books, Edward Elgar Publishing, number 18668.
    2. Fauser, Hannes & Godar, Sarah, 2021. "Income tax noncompliance in Germany, 2001-2014," Discussion Papers 2021/17, Free University Berlin, School of Business & Economics.
    3. Mehmet Burak Turgut & Tomasz Tratkiewicz, 2023. "Estimate of the Underground Economy in Poland Based on Household Expenditures and Incomes," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 15(1), pages 1-29, March.
    4. Friedrich Schneider, 2023. "Do Different Estimation Methods Lead to Implausible Differences in the Size of Nonobserved or Shadow Economies? A Preliminary Answer," Annual Review of Resource Economics, Annual Reviews, vol. 15(1), pages 257-277, October.
    5. Cingl, Lubomír & Lichard, Tomáš & Miklánek, Tomáš, 2023. "Tax designation effects on compliance: An online experiment with taxpayers," Journal of Economic Behavior & Organization, Elsevier, vol. 214(C), pages 615-633.
    6. Tomáš Lichard & Filip Pertold & Samuel Škoda, 2021. "Do women face a glass ceiling at home? The division of household labor among dual-earner couples," Review of Economics of the Household, Springer, vol. 19(4), pages 1209-1243, December.
    7. Mangirdas Morkunas, 2022. "Measuring the Level of the Youth Informal Economy in Lithuania in 2004–2020," Economies, MDPI, vol. 10(11), pages 1-13, November.

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    More about this item

    Keywords

    Tax evasion; Income underreporting; Consumption–income gap; Income inequality;
    All these keywords.

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy

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