Hidden in plain sight: using household data to measure the shadow economy

We develop an estimator of unreported income that relies on more flexible identifying assumptions than those that have been used previously. Assuming only that evaders have a higher consumption-income gap than non-evaders in surveys, our model enables the estimation of both the probability of hiding income and the amount of unreported income for each household. We illustrate the method using Czech and Slovak household budget surveys. Our results are robust to alternative specifications. Furthermore, we show that since the underreported share decreases with reported income, income inequality in these countries may be lower than suggested by the reported income.

Automated summary

The study introduces a method for estimating unreported income that relies on flexible assumptions, allowing for the estimation of the probability and amount of hidden income for each household. By analyzing data from Czech and Slovak household surveys, the results show that the underreported income share decreases with reported income, potentially leading to lower income inequality in these countries than previously thought.