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Controlling for fixed effects in studies of income underreporting

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Abstract

The expenditure method of Pissarides and Weber (1989) [Journal of Public Economics, 39 (1), 17-32) shows how one backs out measure of income underreporting by the self-employed by using food consumption as trace of true income. In this paper we make a case for using panel data and fixed effects estimation in such analysis, instead of OLS estimation. The main argument is that fixed effects estimation addresses the problem of omitted variable bias in the identification. We demonstrate the use of panel data and fixed effects estimation by using large scale administrative register data on charitable donations, exploiting that the data can be turned into a panel dataset. The results suggest that the estimation technique matters – fixed effects estimates are smaller than OLS estimates.

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  • Odd E. Nygård & Thor O. Thoresen, 2023. "Controlling for fixed effects in studies of income underreporting," Discussion Papers 1000, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:1000
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    Cited by:

    1. Bjørkheim, Julie Brun & Nygård, Odd E., 2024. "Gender Differences in Tax Evasion: Evidence from Norwegian Administrative Data," Discussion Papers 2024/8, Norwegian School of Economics, Department of Business and Management Science.

    More about this item

    Keywords

    Income underreporting; register data; expenditure approach; fixed effects estimation;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis

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