Working Paper: NBER ID: w31963
Authors: Francesco Pappad; Kenneth S. Rogoff
Abstract: This paper offers a new approach to measuring the size of the informal economy based on VAT data for the European Union. Although data intensive, our EVADE measure is simpler and more transparent than existing measures. EVADE also shows more variation across countries of Europe than earlier measures, including higher informality in Greece, Italy and Spain, for example. Moreover, we find considerably higher variation within countries across time; in a cross-country time series regression, controlling for tax rates, we confirm that the informal economy grows significantly in recessions and decreases in booms, which we term the “Hugo effect”.
Keywords: informal economy; VAT compliance; Hugo effect; economic cycles
JEL Codes: E26; E32; H26; O17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Informal Economy Size (E26) | Economic Cycles (E32) |
| Economic Recession (F44) | Informal Economy Increase (E26) |
| Economic Boom (N12) | Informal Economy Decrease (E26) |
| GDP Growth (O49) | Informal Economy Size (E26) |