Measuring the Shadow Economy: Endogenous Switching Regression with Unobserved Separation

22 Pages Posted: 13 Oct 2012

See all articles by Tomas Lichard

Tomas Lichard

Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences

Jan Hanousek

Faculty of Business and Economics, Mendel University in Brno; Centre for Economic Policy Research (CEPR)

Randall K. Filer

City University of New York, CUNY Hunter College - Department of Economics; Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences; University of Michigan at Ann Arbor - The William Davidson Institute; CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: October 13, 2012

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.

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

JEL Classification: C34, E01, H26, J39

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: https://ssrn.com/abstract=2161238 or http://dx.doi.org/10.2139/ssrn.2161238

Tomas Lichard (Contact Author)

Charles University in Prague - CERGE-EI, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences ( email )

Politickych veznu 7
Prague, 111 21
Czech Republic

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

Jan Hanousek

Faculty of Business and Economics, Mendel University in Brno ( email )

Brno
Czech Republic

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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, a joint workplace of Charles University and the Economics Institute of the Czech Academy of Sciences ( email )

Politickych veznu 7
Prague, 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

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