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Measuring the unobservable: estimating informal economy by a structural equation modeling approach

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  • Roberto Dell’Anno

    (University of Salerno)

Abstract

This article proposes a new approach to estimate the informal economy (IE) by using Structural Equation Modeling (SEM). Using a Monte Carlo Simulation and empirical analysis of the Italian IE as an example, we provide general conclusions on the reliability and limitations of the SEM approach to estimate the IE. Practical guidelines on how to apply this method and the way to deal with the most problematic issues are provided. We conclude that the SEM approach may be effectively used, as a complementary method to the National Accounting Approach, to adjust official statistics for the presence of the IE.

Suggested Citation

  • Roberto Dell’Anno, 2023. "Measuring the unobservable: estimating informal economy by a structural equation modeling approach," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 30(1), pages 247-277, February.
    • Handle: RePEc:kap:itaxpf:v:30:y:2023:i:1:d:10.1007_s10797-022-09742-0
    DOI: 10.1007/s10797-022-09742-0
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    References listed on IDEAS

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    1. Feige, Edgar L., 2015. "Reflections on the meaning and measurement of Unobserved Economies: What do we really know about the “Shadow Economy”?," MPRA Paper 68466, University Library of Munich, Germany.
    2. William W. Gould & Jeffrey Pitblado & Brian Poi, 2010. "Maximum Likelihood Estimation with Stata," Stata Press books, StataCorp LP, edition 4, number ml4, March.
    3. Gabriel Ulyssea, 2020. "Informality: Causes and Consequences for Development," Annual Review of Economics, Annual Reviews, vol. 12(1), pages 525-546, August.
    4. Piotr Dybka & Michał Kowalczuk & Bartosz Olesiński & Andrzej Torój & Marek Rozkrut, 2019. "Currency demand and MIMIC models: towards a structured hybrid method of measuring the shadow economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(1), pages 4-40, February.
    5. Fujin Zhou & Remco Oostendorp, 2014. "Measuring True Sales and Underreporting with Matched Firm-Level Survey and Tax Office Data," The Review of Economics and Statistics, MIT Press, vol. 96(3), pages 563-576, July.
    6. Dell’Anno, Roberto & Davidescu, Adriana AnaMaria, 2019. "Estimating shadow economy and tax evasion in Romania. A comparison by different estimation approaches," Economic Analysis and Policy, Elsevier, vol. 63(C), pages 130-149.
    7. Isaiah Andrews & Matthew Gentzkow & Jesse M. Shapiro, 2020. "Transparency in Structural Research," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 38(4), pages 711-722, October.
    8. Roberto Dell’Anno & Friedrich G. Schneider, 2006. "Estimating the underground economy by using MIMIC models: A response to T. Breusch´s critique," Economics working papers 2006-07, Department of Economics, Johannes Kepler University Linz, Austria.
    9. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
    10. Sarstedt, Marko & Hair, Joseph F. & Ringle, Christian M. & Thiele, Kai O. & Gudergan, Siegfried P., 2016. "Estimation issues with PLS and CBSEM: Where the bias lies!," Journal of Business Research, Elsevier, vol. 69(10), pages 3998-4010.
    11. Andreas Buehn & Friedrich Schneider, 2012. "Shadow economies around the world: novel insights, accepted knowledge, and new estimates," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 139-171, February.
    12. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo.
    13. Leandro Medina & Friedrich Schneider, 2020. "Shedding Light on the Shadow Economy," World Economics, World Economics, 1 Ivory Square, Plantation Wharf, London, United Kingdom, SW11 3UE, vol. 21(2), pages 25-82, April.
    14. Joel Slemrod & Caroline Weber, 2012. "Evidence of the invisible: toward a credibility revolution in the empirical analysis of tax evasion and the informal economy," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(1), pages 25-53, February.
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    More about this item

    Keywords

    Informal economy; Shadow economy; Structural equation modeling; MIMIC approach;
    All these keywords.

    JEL classification:

    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • C39 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Other
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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