Shadow Economies in OECD Countries: DGE vs. MIMIC Approaches

Abstract

In this paper we compare the level and driving forces of shadow economies in 38 OECD countries using two different methodologies. One of these is the multiple-indicators- multiple-causes (MIMIC) approach based on an estimation of a structural equation model. The other one is based on a two-sector dynamic general equilibrium (DGE) model developed by Elgin and Oztunali. The average driving forces of the shadow economy of the 38 OECD countries obtained using the MIMIC model show that personal income tax (13.8 %), indirect taxes (14.1 %), tax morale (14.5 %), unemployment (14.7 %), self-employment (14.5 %), growth of GDP (14. 3 %) and business freedom index (14. 2 %) contribute more or less even- ly to shadow economies. However, according to the estimates constructed using the DGE model growth of GDP per-capita has by far the largest effect (24. 7%) followed by indirect taxes (18. 5 %), unemployment (18.3 %), tax morale (17.1 %), personal income tax (11.2 %), self-employment (5.8 %), and business freedom (4.3 %). JEL-Classification: K42, H26, D78, E26