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A Model To Estimate Spatial Distribution Of Informal Economy

  • Albu, Lucian Liviu

    ()

    (Institute of Economic Forecasting, Romanian Academy)

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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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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  1. 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.
  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 & 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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