Abstract

This chapter introduces a new direct method that can be used to measure both amount and determinants of the shadow economy. This method is based on annual surveys of entrepreneurs and draws on the notion that those likely to know how much production/income goes unreported are the entrepreneurs who themselves engage in the misreporting and shadow production. Our estimates of the size of the shadow economy as a proportion of GDP combine misreported business income, unregistered or hidden employees, as well as unreported ‘envelope’ wages. The method used in this chapter requires fewer assumptions than most existing methods, in particular compared to methods based on macro indicators, and is relatively precise about what parts of the economy are captured. We apply this method to measure the size and analyse determinants of the shadow economy in the Baltic countries.