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Title:Measuring the shadow economy: Endogenous switching regression with unobserved separation PDF Logo
Authors:Lichard, Tomáš
Hanousek, Jan
Filer, Randall Keith
Issue Date:2012
Series/Report no.:Discussion Paper Series, Forschungsinstitut zur Zukunft der Arbeit 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.
Subjects:shadow economy
switch regression
income-consumption gap
JEL:C34
E01
H26
J39
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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