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Information Distortions In Social Systems: The Underground Economy And Other Observer-Subject-Policymaker Feedbacks


  • Edgar L. Feige

    (University of Wisconsin-Madison)

  • Robert R. Alford

    (University of California-Santa Cruz)


A vast array of information about economic activity, political behavior and social trends are summarized in quantitative measures, sometimes in a single number such as GDP. Because of their apparent objectivity, simplicity and universality, these measures are used as a basis for both scientific investigations and in the formulation of public policy. These critical ‘facts” are often subject to what we call observer-subject- policy feedback, an interactive mechanism that can seriously distort and bias the economic, social and political indicators that are typically treated as exogenous observations on our complex systems. In fact, information is often endogenous to the system being studied, and a failure to recognize the observer-subject-policymaker feedback mechanism can result in “rational” decisions being based on ‘irrational” information systems. Indeed, we argue that the information content of social indicators is likely to become distorted by the very operation of the economic, social and political institutions they seek to describe. The unobserved economy is an exemplar of this interactive process. Reference: The Underground Economies: Tax Evasion and Information Distortion. Edgar L. Feige (ed.) Cambridge University Press, 1989.

Suggested Citation

  • Edgar L. Feige & Robert R. Alford, 2005. "Information Distortions In Social Systems: The Underground Economy And Other Observer-Subject-Policymaker Feedbacks," Macroeconomics 0501026, EconWPA.
  • Handle: RePEc:wpa:wuwpma:0501026 Note: Type of Document - pdf; pages: 23

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    References listed on IDEAS

    1. Feige, Edgar L., 1985. "The Swedish Payments System and the Underground Economy," Working Paper Series 153, Research Institute of Industrial Economics.
    2. Edgar L. Feige, 2004. "How Big IS the Irregular Economy?," Macroeconomics 0404005, EconWPA.
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    Cited by:

    1. Çule, Monika & Fulton, Murray, 2009. "Business culture and tax evasion: Why corruption and the unofficial economy can persist," Journal of Economic Behavior & Organization, Elsevier, vol. 72(3), pages 811-822, December.

    More about this item


    Underground Economy; Unobserved Economy; observer-subject- policymaker feedback; information bias; policy distortion.;

    JEL classification:

    • C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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