MIMIC Models, Cointegration and Error Correction: An Application to the French Shadow Economy

The analysis of economic loss attributed to the shadow economy has attracted much attention in recent years by both academics and policy makers. Often, multiple indicators multiple causes (MIMIC) models are applied to time series data estimating the size and development of the shadow economy for a particular country. This type of model derives information about the relationship between cause and indicator variables and a latent variable, here the shadow economy, from covariance structures. As most macroeconomic variables do not satisfy stationarity, long run information is lost when employing first differences. Arguably, this shortcoming is rooted in the lack of an appropriate MIMIC model which considers cointegration among variables. This paper develops a MIMIC model which estimates the cointegration equilibrium relationship and the error correction short run dynamics, thereby retaining information for the long run. Using France as our example, we demonstrate that this approach allows researchers to obtain more accurate estimates about the size and development of the shadow economy.shadow economy, tax burden, regulation, unemployment, cointegration, error correction models, MIMIC models

Decentralization and the Shadow Economy: Oates Meets Allingham-Sandmo

This paper studies the impact of decentralization on the shadow economy. We argue that decentralization may decrease the size of the shadow economy mainly through two transmission channels: (1) Decentralization enhancing public sector efficiency (efficiency effect), and (2) decentralization reducing the distance between bureaucrats and economic agents, which increases the probability of detection of shadow economic activities (deterrence effect). Using various measures of fiscal, political and government employment decentralization in a cross-section of countries, we find the deterrence effect to be of more importance. The deterrence effect is stronger, the lower the degree of institutional quality. Remarkably, we find no robust evidence of the efficiency effect.decentralization, shadow economy

Size and Development of the Shadow Economy and of Do-it-yourself Activities in Germany

This paper presents the first MIMIC (multiple indicator multiple causes) model estimate of the size and development of the shadow economy and of do-it-yourself (DIY) activities in Germany from 1970 to 2005. By 2005, they reached a level of about 17% and 4.94%. While the shadow economy has regularly increased over the years, DIY activities – though quite sizeable – have remained more or less constant since the early 1990s. The driving forces for the shadow economy are regulation and tax burden whereas for DIY activities, the level of unemployment is the main factor.shadow economy, do-it-yourself activities, tax burden, regulation, domestic currency in circulation, unemployment, MIMIC models

Estimating the Size of the Shadow Economy: Methods, Problems and Open Questions

This paper presents the various methods to estimate the size of the shadow economy, their strengths and weaknesses. The purpose of the paper is twofold. Firstly, it demonstrates that no ideal method to estimate the size and development of the shadow economy exists. Because of its flexibility, the MIMIC method used to get macro-estimates of the size of the shadow economy is discussed in greater detail. Secondly, the paper focuses on the definition and causal factors of the shadow economy as well as on a comparison of the size of the shadow economy using different estimation methods

Size and development of tax evasion in 38 OECD countries: What do we (not) know?

For the first time we develop a time series of tax evasion (in % of official GDP) for 38 OECD countries over the period 1999 to 2010 based on MIMIC model estimations of the shadow economy. Considering indirect taxation and self-employment as the driving forces of tax evasion, we observe a declining trend of tax evasion between 1999 and 2010 for all countries. The average size of tax evasion across all 38 countries over the period 1999 to 2010 is 3.2% of official GDP. The country with the highest average value is Mexico with 6.8%, followed by Turkey with 6.7%; at the lower end we find the United States and Luxembourg with 0.5% and 1.3%, respectively

MIMIC models, cointegration and error correction: an application to the French shadow economy

The analysis of economic loss attributed to the shadow economy has attracted much attention in recent years by both academics and policy makers. Often, multiple indicators multiple causes (MIMIC) models are applied to time series data estimating the size and development of the shadow economy for a particular country. This type of model derives information about the relationship between cause and indicator variables and a latent variable, here the shadow economy, from covariance structures. As most macroeconomic variables do not satisfy stationarity, long run information is lost when employing first differences. Arguably, this shortcoming is rooted in the lack of an appropriate MIMIC model which considers cointegration among variables. This paper develops a MIMIC model which estimates the cointegration equilibrium relationship and the error correction short run dynamics, thereby retaining information for the long run. Using France as our example, we demonstrate that this approach allows researchers to obtain more accurate estimates about the size and development of the shadow economy

MIMIC models, cointegration and error correction: an application to the French shadow economy

The analysis of economic loss attributed to the shadow economy has attracted much attention in recent years by both academics and policy makers. Often, multiple indicators multiple causes (MIMIC) models are applied to time series data estimating the size and development of the shadow economy for a particular country. This type of model derives information about the relationship between cause and indicator variables and a latent variable, here the shadow economy, from covariance structures. As most macroeconomic variables do not satisfy stationarity, long run information is lost when employing first differences. Arguably, this shortcoming is rooted in the lack of an appropriate MIMIC model which considers cointegration among variables. This paper develops a MIMIC model which estimates the cointegration equilibrium relationship and the error correction short run dynamics, thereby retaining information for the long run. Using France as our example, we demonstrate that this approach allows researchers to obtain more accurate estimates about the size and development of the shadow economy

Informal Economic Activities

The dissertation “Informal Economic Activities” takes a comprehensive approach to the informal economy by studying traditional shadow economic activities, household DIY activities, and the smuggling of illegal and legal goods. Chapter 2 analyzes shadow economic and DIY activities and presents a dual estimation for the development of both types of informal economic activities in Germany from 1970 to 2005. It also considers the impact of German reunification on shadow economic and DIY activities and employs a proper estimate of domestic currency in circulation within Germany as an indicator variable for the shadow economy. Chapter 3 studies an informal economic activity that has attracted much attention recently: legal goods smuggling, or the illegal trade of otherwise legal goods. The main channel of this type of smuggling is the falsification of trade documents. By reporting false amounts of exports and/or imports to authorities smugglers, or trade misinvoicers, seek to avoid paying taxes and/or tariffs. Chapter 4 widens the analysis of smuggling to the smuggling of illegal goods and studies the smuggling of legal and illegal goods across the U.S.-Mexico border in order to improve the understanding of illegal trade. Studying the U.S.-Mexican case is particularly interesting as most illegal drugs and immigrants enter the United States via the Mexican border. The empirical analyses in the dissertation “Informal Economic Activities” are based on structural equation models (SEMs). The results demonstrate that the informal economy is significant and that growth of the informal economy is not exclusive to developing countries, although it is a more serious problem in these countries. Moreover, although the informal economy covers a wide range of rather diverse economic activities, the dissertation works out that a few similarities exist. These are important, especially for policymakers, in first understanding what drives informal economic activities and second designing appropriate policies to deter them

Decentralizatin and the shadow economy: Oates meets Allingham-Sandmo

This paper studies the impact of decentralization on the shadow economy. We argue that decentralization may decrease the size of the shadow economy mainly through two transmission channels: (1) Decentralization enhancing public sector efficiency (efficiency effect), and (2) decentralization reducing the distance between bureaucrats and economic agents, which increases the probability of detection of shadow economic activities (deterrence effect). Using various measures of fiscal, political and government employment decentralization in a cross-section of countries, we find the deterrence effect to be of more importance. The deterrence effect is stronger, the lower the degree of institutional quality. Remarkably, we find no robust evidence of the efficiency effect

Size and development of the shadow economy and of do-it-yourself activities in Germany

This paper presents the first MIMIC (multiple indicator multiple causes) model estimate of the size and development of the shadow economy and of do-it-yourself (DIY) activities in Germany from 1970 to 2005. By 2005, they reached a level of about 17% and 4.94%. While the shadow economy has regularly increased over the years, DIY activities - though quite sizeable - have remained more or less constant since the early 1990s. The driving forces for the shadow economy are regulation and tax burden whereas for DIY activities, the level of unemployment is the main factor