Location of Repository

Board of Governors of the Federal Reserve System

By Erik Hurst, Geng Li, Benjamin Pugsley, Steve Davis, Joshua Gottlieb, Larry Katz, Bruce Meyer, Matt Notowidingo, Michael Palumbo and Jesse Shapiro

Abstract

There is a large literature showing that the self-employed underreport their income to tax authorities. In this paper, we quantify the extent to which the self-employed also systematically underreport their income in U.S. household surveys. To do so, we use the Engel curve describing the relationship between income and expenditures of wage and salary workers to infer the actual income, and thus the reporting gap, of the self-employed based on their reported expenditures. We find that the self-employed underreport their income by about 30 percent. This result is remarkably robust across data sources and alternative model specifications. Failing to account for such income underreporting leads to biased conclusions. We document this bias in existing measures of earnings differentials, wealth differentials, precautionary savings, lifecycle earnings profiles, and earnings variation across MSAs. Our results show that it is naive for researcher to take it for granted that individuals will provide unbiased information to household surveys given their demonstrated tendency of providing distorted reports of the same information to other administrative sources. * We would like to thank the following for their helpful comments and discussions: Kerwin Charles, Raj Chetty

Year: 2011
OAI identifier: oai:CiteSeerX.psu:10.1.1.190.2621
Provided by: CiteSeerX
Download PDF:
Sorry, we are unable to provide the full text but you may find it at the following location(s):
  • http://citeseerx.ist.psu.edu/v... (external link)
  • http://cep.lse.ac.uk/seminarpa... (external link)
  • Suggested articles


    To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.