Chapter 6: Regional Patterns of the Shadow Economy: Modelling Issues and Evidence from the European Union
Helmut Herwartz, Friedrich Schneider and Egle Tafenau 6.1 INTRODUCTION Shadow economy has so far drawn attention mainly on the level of countries. Its extent has been estimated relying on country-specific time series and surveys or cross-sectional and panel data for several economies. The regional aspects of the shadow economy have received less attention, though this could deliver additional important information for policy decisions and has also advantages for purposes of estimation and model diagnosis. In considering the merits of the regional estimates of the shadow economy for policy decisions, two main benefits arise. First, information about the differences in the extent of the shadow economy helps governments to set accurate targets in combating shadow economy or detecting tax fraud. This is especially the case if it is possible to gather information on region-specific sources of hidden economic activity. Second, supporting the design of regional policies, the estimates of the shadow economy can be employed to derive estimates of total economic activity in each region. Concerning the estimation itself, gains arise from the employment of regional data if the extent of the shadow economy is measured based on aggregated data, for example with the help of the Multiple Indicators Multiple Causes (MIMIC, see also Chapters 1 and 2) approach. The extent of the shadow economy is modelled in this framework as an outcome of causal variables like taxes, size of the governmental sector and labour market conditions. At the same time, shadow economy clearly affects these phenomena. For instance, Herwartz & Theilen...
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