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Information Distortions In Social Systems: The Underground Economy And Other Observer-Subject-Policymaker Feedbacks


Author Info

  • Edgar L. Feige

    (University of Wisconsin-Madison)

  • Robert R. Alford

    (University of California-Santa Cruz)


A vast array of information about economic activity, political behavior and social trends are summarized in quantitative measures, sometimes in a single number such as GDP. Because of their apparent objectivity, simplicity and universality, these measures are used as a basis for both scientific investigations and in the formulation of public policy. These critical ‘facts” are often subject to what we call observer-subject- policy feedback, an interactive mechanism that can seriously distort and bias the economic, social and political indicators that are typically treated as exogenous observations on our complex systems. In fact, information is often endogenous to the system being studied, and a failure to recognize the observer-subject-policymaker feedback mechanism can result in “rational” decisions being based on ‘irrational” information systems. Indeed, we argue that the information content of social indicators is likely to become distorted by the very operation of the economic, social and political institutions they seek to describe. The unobserved economy is an exemplar of this interactive process. Reference: The Underground Economies: Tax Evasion and Information Distortion. Edgar L. Feige (ed.) Cambridge University Press, 1989.

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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0501026.

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Length: 23 pages
Date of creation: 20 Jan 2005
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Handle: RePEc:wpa:wuwpma:0501026

Note: Type of Document - pdf; pages: 23
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Related research

Keywords: Underground Economy; Unobserved Economy; observer-subject- policymaker feedback; information bias; policy distortion.;

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Cited by:
  1. Klarita Gerxhani, 1999. "Informal Sector in Developed and less Developed Countries: A Literature Survey," Tinbergen Institute Discussion Papers 99-083/2, Tinbergen Institute.
  2. Çule, Monika & Fulton, Murray, 2009. "Business culture and tax evasion: Why corruption and the unofficial economy can persist," Journal of Economic Behavior & Organization, Elsevier, vol. 72(3), pages 811-822, December.


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