A model to estimate informal economy at regional level: Theoretical and empirical investigation

Albu, Lucian-Liviu (2007): A model to estimate informal economy at regional level: Theoretical and empirical investigation. Unpublished.

Abstract

Many problems emerge since it is widely believed that high tax rates and ineffective tax collection by government are the main causes contributing to the rise of the informal economy. Already the economists have established a relationship between tax rates and tax evasion or size of the informal economy. The higher is the level of taxation, the greater incentive is to participate in informal economic activities and escape taxes. At the macroeconomic level, there is a number of so-called indirect methods used to estimate the size and dynamics of informal economy, reported in literature as “Monetary Approach”, “Implicit Labour Supply Method”, “National Accountancy”, “Energy Consumption Method”, etc. Unfortunately, many times there are huge differences among the estimated shares of informal or underground economy obtained by various methods. For instance, in case of Romania the figures are between about 20% of GDP, obtained on the base of the energy consumption method and more than 45% computed by using the monetary approach. Also, the figures reported by the National Institute for Statistics (NIS), based on national accounts methodology, increased (mainly due to changes in methodology) from about 5% in 1992, to 18% in 1997 and to 20-22% after 2000. Adding to these figures about 7% of GDP, representing the estimated level for self-consumption in case of a rural household, legal non-registered but informal, resulted that last years the informal economy is responsible of 27-29% of national economy. In this article, coming from certain general accepted finding of the theory in matter of modelling underground economy, we concentrate on evaluating analytically the limit-values of certain important parameters involved in models used to estimate the size of underground economy and to explain the mechanisms of its dynamics. Then we shall simulate some exercises on available data. The second goal of the paper is to report some conclusions of our investigation based on data supplied by special surveys organised in Romania. Also, in order to see since certain hypotheses (referring to the complex transmission mechanism from the tax policy decisions to the effective implication of agents into informal economy) are statistically verified and to extend the study from the aggregate level to a deep research inside the population set in regions, we used data supplied by this special large survey, which already were processed and are available in our database.

• Item Type: MPRA Paper
• Additional Information: Paper prepared for the International Conference on Regional and Urban Modeling, Free University of Brussels, June 1-2, 2007
• Institution: Institute for Economic Forecasting, Bucharest
• Language: English
• Keywords: informal economy; invisible sector; tax rate; probability of detection; risk-aversion; computer assistance
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C13 - Estimation; H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H31 - Household; O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements: Legal, Social, Economic, and Political; D - Microeconomics > D3 - Distribution > D31 - Personal Income, Wealth, and Their Distributions; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation

References

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