Observer-Subject Feedback: The Dynamics Of The Unobserved Economy
This paper examines the role of “observer-subject feedback” namely the interaction effect between the social science observer and the subject being observed. When the observer is the government and the subject is a citizen, it is often the case that the subject may have incentives to distort the information given to the observer. When this occurs, information becomes endogenous to the economic system, and distorted information, can in turn have negative feedback consequences when it is used by policymakers to affect the system itself. The underground (unobserved, unrecorded) economy is a prime example of endogenous information bias arising from observer-subject feedback. The paper analyses the dynamics of the unobserved economy and its consequences for our scientific perceptions.
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