Hidden Income Research Articles

Hidden Income and the Perceived Returns to Migration

In many developing economies, urban workers earn substantially more than rural workers with the same level of education. Why don't more rural workers migrate to cities? I use two field experiments in Kenya to show that low migration is partly due to underestimation of urban incomes, which is sustained by income hiding by migrants. Parents at the origin underestimate their migrant children's incomes by nearly half, and underestimation is greater when a migrant's remittance obligations are high. Providing information about urban earnings increases migration to the capital city by about 40 percent over two years. (JEL C93, J31, J61, J82, O15, O18, R23)

Sustainable Development of State-Owned Enterprises: Research on the Management Transformation Path of Mixed-Ownership Companies from the Perspective of Shareholders Relationship

In recent years, the development of China’s state-owned companies (SOEs) has slowed dramatically due to the improvement of the government–enterprise relationship and maturity in the market system. To accomplish the market-oriented transformation of the management model and promote sustainable development, some SOEs have incorporated private capital to conduct mixed-ownership reforms. Nonetheless, the emergence of heterogeneous shareholder conflicts seriously hampers the transformation of businesses. This paper proposed a two-party evolutionary game model between state-owned and private shareholders in the management transformation of mixed-ownership companies. Based on the proposed model, the evolutionary stability of heterogeneous shareholders’ action strategies was analyzed to obtain the evolutionary stability strategies for the system. The crucial factors of the ideal equilibrium strategies are studied at the same time. The analysis results show that the probability of “change” in private shareholders is positively proportional to factors such as the success rate of change, change dividend, control gain, and policy burden, and it is inversely proportional to the factors including the cost of change, contractual cost of private shareholders, the additional cost of change, hidden income, state-owned shareholders’ shareholding ratio, and loss of change failure. Finally, the findings of this study provide a theoretical foundation for the transition of mixed-ownership enterprises’ management systems.

Evolutionary Game of Knowledge Sharing in the Advanced Manufacturing Industry

With the advent of the era of knowledge economy, knowledge resources have gradually become the core resources for industrial development. For advanced manufacturing, strengthening the knowledge sharing between enterprises has become a key factor of the industry to maintain their core competitiveness. Based on the perspective of knowledge sharing, this study constructs an evolutionary game model among advanced manufacturing enterprises and analyzes the dynamic evolution process of enterprises. The result shows that knowledge spillover effects, excess return distribution, knowledge costs, hidden income, and punishment mechanisms are the main factors influencing the choice of evolutionary strategies for knowledge sharing among enterprises. Based on the analysis results, the study gives some suggestions to encourage advanced manufacturing companies to choose knowledge sharing strategies, to promote the rapid development of advanced manufacturing.

Social Aspects of State Regulation of Agricultural Production

State regulation of agricultural production in Ukraine is aimed at increasing production and ensuring food security of the country and its population. However, the low level of social development, as well as social problems, which in rural areas among the population have now become particularly acute, reduce the potential of this area of the national economy. That is why the question arises of finding active incentives, tools and mechanisms that would encourage the rural population to act and create a promising basis for improving its social status. One of the main existing problems of state regulation of agricultural production in Ukraine is the provision of financial incentives to large agricultural producers. And although such a policy has allowed to increase export potential, but has led to the destruction of rural areas and the impoverishment of the rural population. The intensive activities of these producers on the basis of intensive technologies have led to significant imbalances in the development of the industry with the prevalence of crop production and the decline of livestock, reduced soil quality, as well as rising unemployment of the rural population. This has led to an increase in the shadow sector through illegal activities and hidden income.

Underground economy and GDP growth: Evidence from China’s tax reforms

Since 1991, China has implemented two significant tax reforms. The first reform, in 1994, was a large-scale adjustment of the tax distribution system between the central and local governments, and the second reform, in 2012, replaced business tax with value-added tax. Also, the size of China’s underground economy decreased from 13.55% in 1995 to 12.30% in 2016. The paper presents an evaluation of the effect of the two tax reforms and the existing underground economy on GDP growth in China. GDP is defined as explained variable, the explanatory variables include: the ratio of declared income to actual income, the change of concealed income, and the influence of tax rate change on declared income and concealed income. According to the tax reform in 1994 and 2012, two dummy variables are set respectively. In methodology, this paper uses Simultaneous equations model, SUR-OLSs and Slutsky identity. Our estimation is based on the official statistics of China National Bureau of Statistics in the period from 1991 to 2019. In empirical analysis, we decomposed tax changes into tax rate effect (change of budget constraint slope) and income effect (change of tax liability), then analyzed the impact of tax elasticity on GDP growth. The empirical results demonstrate that both the 1994 tax reform and 2012 tax reform have had a positive impact on GDP, with high statistical significance respectively. The results also confirm that the increase of tax rate leads to the increase of hidden income, which eventually leads to the decrease of GDP. The offered methodology can also be applied to most countries for time series analyses.

Скрытые доходы российских домашних хозяйств: у кого они?

The article presents quantitative characteristics of the prevalence and volumes of hidden household incomes. An econometric estimate of the prevalence of hidden incomes was carried out on the panel data of the “Russian Monitoring of the Economic Situation and Health of the Population of the Higher School of Economics” (periods from 2000 to 2017), the size of the hidden income component was obtained on the basis of the Pissarides-Weber model. Estimates of the share of hidden income households and an estimate of the share of hidden incomes revealed two different trends: their predominant distribution among residents of villages and urban-type settlements and the larger size of these incomes among households of regional centers.

Hidden Income and the Perceived Returns to Migration: Experimental Evidence from Kenya

In many developing economies, urban workers earn substantially more than rural workers with the same level of education. Why don't more rural workers migrate to cities? I use two field experiments in Kenya to show that low migration is partly due to underestimation of urban incomes, and that this inaccurate information can be sustained by migrants' strategic motives to hide income to minimize remittance obligations. Parents underestimate their migrant children's incomes by nearly half, and underestimation is greater when a migrant's incentive to hide income is higher. Providing information about urban earnings increases migration to the capital city by 39% over two years.

Loan and Grant Support for Students in the Context of the Diversification of Funding Sources for Higher Education

[full article and abstract in English]
 This paper considers the mechanism of direct state support for students in European countries using loans and grants: their functions, forms, schemes, and conditions for provision. The peculiarities of the state preferential educational loan in Ukraine and the reasons for its curtailment since 2011 are determined. Nowadays, it is established that the main form of state support for Ukrainian students who receive higher education in public procurement comes with academic and social scholarships, whereas students who receive higher education under a contract of preferential state lending yet after the curtailment of the program are deprived of any state support. The necessity of restoring the program of preferential state lending for students and the directions of its improvement, such as the establishment of an interest rate on a loan based on the level of inflation, the establishment of a minimum amount of annual payments on a loan as a percentage of the minimum salary, the distribution of the risk of non-repayment of a loan between the state, the borrower and his parent, are all substantiated. This is done taking into account the financial capabilities of the Ukrainian state and the high levels of hidden income. We consider the establishment of conditions needed for the development of a system of commercial educational loans, by providing for the provision of a state guarantee on it and partial state subsidy of interest rates. We consider the areas of improvement of scholarship support of students and substantiate the necessity of introducing education at least for orphans, children deprived of parental care, and disabled children.

Income hiding and informal redistribution: A lab-in-the-field experiment in Senegal

We estimate the hidden cost of social obligations to redistribute exploiting data from a controlled setting in urban Senegal, which combines lab-in-the-field measures and out-of-lab follow-up data. We estimate a social tax of about 9 percent. When given the opportunity to get hidden income, individuals decrease by 26 percent the share of gains they transfer to kin — mostly outside the household — and increase health and personal expenses. We expand on prior literature by both identifying the individual cost of informal redistribution and then relating it to postexperiment resource-allocation decisions, and by disentangling intra- and interhousehold redistributive pressure.

Problems of corruption and tax evasion in construction sector in Belarus

Construction sector is on of the most closed and corrupted sector in many countries. Belarus is no exception. For understanding the real situation with corruption and tax evasion in construction sector in Belarus the survey of 50 construction companies was done. According to achieved results, a large share of respondents agreed that some companies of the sector have hidden income, pay salaries in envelopes and spend some money for resolving problems with state institutions. At the same time construction enterprises that participated in tenders on municipal procurement underline many problems in this specific sphere. All these problems can be divided by administrative, economic and problems associated with the existence of corruption and the shadow economy. The most popular answers include corruption, unfair competition and imperfect legislation. On the base of international experience and the results of the survey we develop the list of recommendations for decreasing the level of corruption and tax evasion in construction sector that will support to create favorable environment for business development of the country.

Efficient Risk Sharing with Limited Commitment and Storage

We extend the model of risk sharing with limited commitment (Kocherlakota, 1996 )b y introducing both a public and a private (non-contractible and/or non-observable) storage technology. Positive public storage relaxes future participation constraints and may hence improve risk sharing, contrary to the case where hidden income or effort is the deep friction. The characteristics of constrained-efficient allocations crucially depend on the storage technology’s return. In the long run, if the return on storage is (i) moderately high, both assets and the consumption distribution may remain time-varying; (ii) sufficiently high, assets converge almost surely to a constant and the consumption distribution is time-invariant; (iii) equal to agents’ discount rate, perfect risk sharing is self-enforcing. Agents never have an incentive to use their private storage technology, i.e., Euler inequalities are always satisfied, at the constrained-efficient allocation of our model, while this is not the case without optimal public asset accumulation.

Examining the Factors of Tax Non-Compliance: A Case Study of Small and Medium Enterprises in Metro Area

Hidden income is a business income and individual income should be recorded and taxed but taxpayers are not reported in full or not reported at all. In this paper we examine the determinants of tax non-compliance among Small and Medium Enterprises (SMEs) in Metro area. 150 questionnaires were distributed to the three sectors namely, distribution, food and beverages, and service providers; only 86 agreed to participate (57.3%). Kaiser-Meyer-Olkin, descriptive and Pearson correlation test were used to analyse the data. The results indicate that there was a number of significant relationship between tax incentive and company size towards tax non-compliance. Therefore, the importance of this phenomenon is the potential serious revenue losses to government and resulting in the possible under funding of public’s service and also an unfair burden on honest citizens.

Dynamic Epidemiology: Spillovers from Limited Commitment and Private Information

Can variations in immunization rates be accounted for by differences in information and commitment technologies? I document four salient facts regarding DPT vaccination rates: (i) lower immunization in countries with greater costs of contract enforcement, (ii) higher volatility in immunization in countries with larger informal sectors, (iii) less persistence in immunization relative to aggregate income, and (iv) negative skewness in the distribution of immunization over time. These patterns cannot be explained by efficient immunization in a frictionless economy. However, dynamic contracts subject to ex-post one-sided commitment and hidden income can rationalize these facts. This analysis shows that weak provision of public goods, such as the inefficacy of the judicial system and the degree of informality, can spillover to weak provision of preventive healthcare. A model estimated using U.S. data reveals that an income monitoring technology is welfare enhancing in the long-run, generating an increase of 4.27% in certainty equivalent consumption of the policyholder and 0.6% in the insurer’s surplus. Moreover, efficient risk outcomes estimated using output losses stemming from chronic diseases across U.S. states explain over 90% of ACA Prevention Fund allotments enacted by the CDC. For countries in which a large share of medical expenditure is incurred out-of-pocket, I propose an identification strategy that leverages national account data and labor statistics to construct a time-series for preventive healthcare expenditure. Using the consumption neutrality of the efficient risk choice, I also devise a test to show that the hypothesis of limited commitment cannot be rejected in the data.

Perspective of Problems and Countermeasures by the Analysis of the Collection Data on the Personal Income Tax Collection and Administration of High Income Groups

In recent years, the collection and administration of personal income tax of high income groups have always been the emphasis and difficulty of the tax authority. This article analyzes the personal income tax collection and management data of GZ city Y area local taxation bureau, and finds that the current tax authorities on the personal income tax levy management have some problems, such as the individual income tax of the total amount of wages and salaries accounts for a large proportion of the total individual income tax, and it is difficult to regulate the individual business production and operation income and labor remuneration income, and the number of foreign individuals hidden income rise, etc. The working practice is also connected to discuss and analyze the above problems, putting forward many measures to establish and improve the system of tax assessment, building effective network for assistance and protection of tax, strengthening the collection and management of various income taxes, establishing individual tax registration system and personal bank account system, reinforcing audit and penalties and so on.

Public goods, hidden income, and tax evasion: Some nonstandard results from the warm-glow model

A large literature explores crowd out in situations where public goods are jointly provided; work in this area typically depicts a tax system where individuals take taxes as given. But in some settings, such as those in developing economies, efforts to evade or avoid taxes may be widespread. Using the canonical warm-glow model, this paper considers joint public-good provision in a setting where individuals can evade taxes by hiding their income. The model's implications change significantly in this setting: with hidden income, stronger warm glow will lead to greater crowd out, not less. Using research on crowd out and inter-family transfers, I present suggestive evidence that the model's results may help to reconcile divergent estimates of crowd out in the literature.

Imputation of Housing Rents for Owners Using Models With Heckman Correction

The direct income of owners and tenants of dwellings is not comparable since the owners have a hidden income from the investment in their dwelling. This hidden income is considered a part of the disposable income of owners. It may be predicted with the help of a linear model of the rent. Since such a model must be developed and estimated for tenants with observed market rents a selection bias may occur. The selection bias can be minimised through a Heckman correction. The paper applies the Heckman correction to data from the Swiss Statistics on Income and Living Conditions. The Heckman method is adapted to the survey context, the modeling process including the choice of covariates is explained and the effect of the prediction using the model is discussed.

Hidden Income in China and Its Implications

This article discusses the existence and quantity of hidden or “gray” income in China, its sources, and how it has contributed to domestic income disparity. Gray income is a serious threat to China’s economic and social development because it leads to unequal and unfair income distribution and weakened domestic demand, puts social stability at risk, and threatens to undermine future economic development. This article recommends a number of reforms to improve China’s budgetary and taxation systems as well as its government administrative system in order to build a more transparent and better-regulated national administrative framework. This article discusses the existence and quantity of hidden or “gray” income in China, its sources, and how it has contributed to domestic income disparity. The article suggests four major sources of gray income: tax evasion, income for which justification is unregulated, misappropriation of public resources, and rents from the abuse of government power. Gray income is a serious threat to China’s economic and social development because it leads to unequal and unfair income distribution and weakened domestic demand, puts social stability at risk, and threatens to undermine future economic development. This article recommends a number of reforms to improve China’s budgetary and taxation systems as well as its government administrative system in order to build a more transparent and better-regulated national administrative framework.

A comparison of the Russian 13% flat rate PIT evasion stratified contributions and the US tax schedule

The empirical study of Russian Personal Income Tax (PIT) evasion proves the existence of middle-class high-income groups able to finance the state but which lack a sufficient tax compliant attitude. The size of their income almost functionally positively correlates with tax evasion preferences. Within the flat rate the largest contribution to the general evasion in terms of hidden income comes from the middle-class groups and not from the richest Russians or the upper-middle class. The flat 13% PIT rate compared to the US IRS progressive schedule, both in case of absence and presence of tax evasion, is less favorable in terms of budget revenue and social justice. It is concluded that a positive outcome of flat rate introduction can be only achieved if the tax discipline of 10% of the richest citizens improves considerably. If the tax evasion preferences of the population remain the same, the introduction of a flat rate will hinder budget revenue and tax contribution redistribution.

The hidden economy in Spain - A monetary estimation, 1964-1998

The aim of this paper is to estimate the level and evolution of hidden income in Spain during the period 1964–1997. To this end, we employ the well-known monetary approach which supposes that the hidden economy is a response on the part of the economic agents to the tax burden, one which manifests itself in an excess of demand for currency. The estimation has been made on the basis of the ADL technique, an ECM and Johansen's cointegration approach. The period chosen was characterised by multiple institutional changes, an increase in the tax burden and wide-ranging financial liberalisation. This has obliged us to formulate a specific monetary model to estimate the hidden economy and is one of the original features of that model.

Dynamic Mechanism Design with Hidden Income and Hidden Actions:
 Technical Appendix

In our paper Dynamic Mechanism Design with Hidden Income and Hidden Actions, we develop general recursive methods to solve for optimal contracts in dynamic principal-agent models with hidden income and hidden actions. This appendix provides the detailed derivations of all recursive formulations presented in the paper, as well as proofs for all propositions.