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A Model To Estimate Spatial Distribution Of Informal Economy

Author

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  • 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.

Suggested Citation

  • Albu, Lucian Liviu, 2008. "A Model To Estimate Spatial Distribution Of Informal Economy," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 5(4), pages 111-124, December.
  • Handle: RePEc:rjr:romjef:v:5:y:2008:i:4:p:111-124
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    References listed on IDEAS

    as
    1. 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.
    2. Lucian-Liviu ALBU, "undated". "A Model to Estimate Informal Economy at Regional Level: Theoretical and Empirical Investigation," Regional and Urban Modeling 284100002, EcoMod.
    3. 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 231-254, March.
    4. Albu, Lucian Liviu & Kim, Byung Yeon & Duchene, Gerard, 2002. "AN ATTEMPT TO ESTIMATE THE SIZE OF INFORMAL ECONOMY BASED ON HOUSEHOLD BEHAVIOUR MODELING (l)," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 17-24, March.
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    Citations

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    Cited by:

    1. Ceausescu Ionut, 2015. "Underground Economy, Influences On National Economies," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 2, pages 344-348, April.
    2. 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.
    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.
    4. Ciuiu, Daniel, 2010. "Modeling the fraud-like investment founds by Petri nets," MPRA Paper 23589, University Library of Munich, Germany, revised May 2010.

    More about this item

    Keywords

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

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • I32 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Measurement and Analysis of Poverty
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)

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