Identification of Households Prone to Income Underreporting

Abstract

Pissarides and Weber propose using data on income and food consumption for estimating the extent of income underreporting by the self-employed, a group seen to be prone to income underreporting. This paper is the first to investigate the importance of the way in which these households are identified in such analyses. Using household budget data from Estonia, different ways are used to identify households prone to income underreporting and to estimate the extent of the underreporting. The share of unreported income is estimated to be substantially larger when underreporting households are identified using their share of reported business income than when they are identified using their employment status. Further analysis combines the different identification methods and reveals that the employment status provides no information on underreporting when the share of business income is taken into account. The share of reported business income is the most informative indicator of underreporting.