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Estimating the Underground Economy using MIMIC Models

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  • Trevor Breusch

Abstract

MIMIC models are being used to estimate the size of the underground economy or the tax gap in various countries. In this paper I examine critically both the method in general and three applications of the method by Giles and Tedds (2002), Bajada and Schneider (2005) and Dell’Anno and Schneider (2003). Connections are shown to familiar econometric models of linear regression and simultaneous equations. I also investigate the auxiliary procedures used in this literature, including differencing as a treatment for unit roots and the calibration of results using other data. The three applications demonstrate how the method is subjective and pliable in practice. I conclude that the MIMIC method is unfit for the purpose.

Suggested Citation

  • Trevor Breusch, 2005. "Estimating the Underground Economy using MIMIC Models," Econometrics 0507003, University Library of Munich, Germany, revised 15 Dec 2005.
    • Handle: RePEc:wpa:wuwpem:0507003
    Note: Type of Document - pdf; pages: 36
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    References listed on IDEAS

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    1. Friedrich Schneider & Dominik Enste, 1999. "Shadow Economies Around the World - Size, Causes, and Consequences," CESifo Working Paper Series 196, CESifo.
    2. Trevor Breusch, 2005. "Australia's Cash Economy: Are the Estimates Credible?," The Economic Record, The Economic Society of Australia, vol. 81(255), pages 394-403, December.
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    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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