Estimation methods for the shadow economy. A systematic literature review

Abstract

Estimating the shadow economy is by no means a simple task. The hidden nature of the phenomenon makes it difficult to measure. In the literature, there are various methods used in estimating the shadow economy, each of which has its strengths and weaknesses. This paper aims to be a detailed literature review of the different types of methods existing at the current time. The review can be a good reference in deciding which of the methods is best to serve one’s purpose when measuring the underground economy. Analyzing the advantages and shortcomings of each method, as well as the methodology used, can lead to a rational decision regarding the estimation of the shadow economy. Reviewing the literature, we identified three main groups of methods for estimating the shadow economy: 1) Direct methods; 2) Indirect methods; and 3) Model approach. Over the years, there has been an increasing interest in developing estimation models for the shadow economy, but, to date, there is no universally accepted definition for the concept, nor a universally accepted type of model used. However, the most frequently used method to estimate the shadow economy, in recent years has been the model approach (MIMIC), despite its limitations. When deciding which model to use to estimate the shadow economy, one has to consider the definition of the concept (what kinds of activities will be included), the availability of data necessary, and the methodology used. Our paper is useful both for academical purposes but also for policy makers in order to find the best tool of measuring the shadow economy around the world countries.