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A Model To Estimate Spatial Distribution Of Informal Economy

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Author Info

  • Albu, Lucian Liviu

    ()
    (Institute of Economic Forecasting, Romanian Academy)

Abstract

Among economists it is widely believed that high tax rates and ineffective tax collection by the government are the main causes contributing to the rise of the informal economy. Economists have already established two relationships, at least empirically demonstrated, between tax rates and tax evasion (or size of informal economy) and, between poverty and informal economy, respectively: the higher the level of taxation or/and poverty degree, the greater incentive to participate in informal sector and avoid paying taxes. At macroeconomic level, there are a number of indirect methods to estimate the size and dynamics of informal economy, such as Monetary Approach, Implicit Labour Supply Method, National Accounting Method, Energy Consumption Method, etc. Unfortunately, there are often huge differences among the estimated shares of informal or underground economy obtained by various methods. In this article, coming from generally accepted findings of the theory in matter of modelling underground economy, we concentrate on evaluating analytically the limit-values of certain parameters involved in the models used to estimate the size of underground economy and to explain the forming mechanism and its dynamics. We are combining in the same model the level of income and tax rate as main determinants of informal economy growth. Then, on the basis of the model, we simulate some exercises on available data. The second goal of our study is to extend investigation at regional level and, finally, to obtain a map reflecting the spatial distribution of informal economy in Romania.

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Bibliographic Info

Article provided by Institute for Economic Forecasting in its journal Romanian Journal for Economic Forecasting.

Volume (Year): 5 (2008)
Issue (Month): 4 (December)
Pages: 111-124

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Handle: RePEc:rjr:romjef:v:5:y:2008:i:4:p:111-124

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Related research

Keywords: informal economy; spatial distribution; probability of detection; risk-aversion;

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References

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  1. Albu, Lucian-Liviu & Kim, Byung-Yeon & Duchene, Gerard, 2002. "An attempt to estimate the size of informal economy based on household behaviour modeling," MPRA Paper 13026, University Library of Munich, Germany.
  2. Lemieux, Thomas & Fortin, Bernard & Frechette, Pierre, 1994. "The Effect of Taxes on Labor Supply in the Underground Economy," American Economic Review, American Economic Association, vol. 84(1), pages 231-54, March.
  3. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
  4. Albu, Lucian-Liviu, 2007. "A model to estimate informal economy at regional level: Theoretical and empirical investigation," MPRA Paper 3760, University Library of Munich, Germany.
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Cited by:
  1. Alexandru Adriana Anamaria & Dobre Ion & Ghinararu Catalin, 2009. "Estimating The Size Of Romanian Shadow Economy Using The Currency Demand Approach," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 2(1), pages 623-631, May.
  2. Ciuiu, Daniel, 2010. "Modeling the fraud-like investment founds by Petri nets," MPRA Paper 23589, University Library of Munich, Germany, revised May 2010.
  3. Sorin-Daniel MANOLE, 2012. "Impact Of Underground Economy Upon The Romanian Economy," Management Strategies Journal, Constantin Brancoveanu University, vol. 18(4), pages 5-12.

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