Using various methods, the size of the shadow economy in 76 developing, transition, and OECD countries is estimated. Average size varies from 12 percent of GDP for OECD countries, to 23 percent for transition countries and 39 percent for developing countries. Increasing taxation and social security contributions combined with rising state regulations are driving forces for the increase of the shadow economy, especially in OECD countries. According to some findings, corruption has a positive impact on the size of the shadow economy, and a growing shadow economy has a negative effect on official GDP growth.

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Shadow Economies: Size, Causes, and Consequences

Dishonesty plays a large role in the economy. Causes for (dis)honest behavior seem to be based partially on external rewards, and partially on internal rewards. Here, we investigate how such external and internal rewards work in concert to produce (dis)honesty. We propose and test a theory of self-concept maintenance that allows people to engage to some level in dishonest behavior, thereby benefiting from external benefits of dishonesty, while maintaining their positive view about themselves in terms of being honest individuals. The results show that (1) given the opportunity to engage in beneficial dishonesty, people will engage in such behaviors; (2) the amount of dishonesty is largely insensitive to either the expected external benefits or the costs associated with the deceptive acts; (3) people know about their actions but do not update their self-concepts; (4) causing people to become more aware of their internal standards for honesty decreases their tendency for deception; and (5) increasing the "degrees of freedom" that people have to interpret their actions increases their tendency for deception. We suggest that dishonesty governed by self-concept maintenance is likely to be prevalent in the economy, and understanding it has important implications for designing effective methods to curb dishonesty.Former working paper titles:“(Dis)Honesty: A Combination of Internal and External Rewards” and "Almost Honest: Internal and External Motives for Honesty")

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1442827_code504062.pdf?abstractid=979648&mirid=1

The Dishonesty of Honest People: A Theory of Self-Concept Maintenance

People like to think of themselves as honest. However, dishonesty pays—and it often pays well. How do people resolve this tension? This research shows that people behave dishonestly enough to profit but honestly enough to delude themselves of their own integrity. A little bit of dishonesty gives a taste of profit without spoiling a positive self-view. Two mechanisms allow for such self-concept maintenance: inattention to moral standards and categorization malleability. Six experiments support the authors' theory of self-concept maintenance and offer practical applications for curbing dishonesty in everyday life.

/pdf/the-dishonesty-of-honest-people-a-theory-of-self-concept-18mg31d5w3.pdf

Deception is part of many economic interactions. Business people, politicians, diplomats, lawyers, and students in the experimental laboratory who make use of private information do not always do so honestly. This observation indicates that behavior often rejects the moral approach to deception. As St. Augustine wrote, “To me, however, it seems certain that every lie is a sin. . . ” (St. Augustine, 421). Later, philosophers like Immanuel Kant (1787) again adopted this uncompromising moral stance when arguing against lying. At the other extreme, economic theory is built on the assumption of “homo economicus,” a figure who acts selfishly and is unconcerned about the well-being of others. An implication of this assumption is that lies will be told whenever it is beneficial for the liar, regardless of their effect on the other party. Another implication is that there is no negative outcome associated with lying per se. This assumption is very useful in many economic models. Consider contract theory, where it is assumed that without an explicit contract, neither side will fulfill its respective obligations. For example, George Akerlof’s (1970) paper on asymmetric information and the market for lemons assumes that sellers of used cars will always lie if it is in their benefit to do so. In the mechanism design literature (e.g., Bengt Holmstrom, 1979), the standard assumption is that people will tell the truth only if this is incentive-compatible given material outcomes. In the literature on tax evasion, the choice of whether to avoid paying taxes is considered a decision under uncertainty; cost is treated as a product of the probability of being caught and the cost of punishment, whereas benefit is simply the money saved by avoiding payment. However, there is no cost associated with the very act of lying (Michael Alingham and Agnar Sandmo, 1972). Another example is the game theoretic treatment of “cheap talk” (Crawford and Joel Sobel, 1982). An intermediate approach is taken by utilitarian philosophers (e.g., Jeremy Bentham, 1789). Utilitarianism prescribes that, when choosing whether to lie, one should weigh benefits against harm, and happiness against unhappiness. As Martin Luther stated, “What harm would it do, if a man told a good strong lie for the sake of the good and for the Christian church. . . a lie out of necessity, a useful lie, a helpful lie, such lies would not be against God, he would accept them.” Similarly to the economic theory approach, this type of calculation implies that lies, apart from their resultant harm and benefit, are in themselves neutral. A lie and a truthful statement that achieve the same monetary payoffs (for both sides) are considered * Graduate School of Business, University of Chicago, 5807 South Woodlawn Avenue, Chicago, IL 60637 (e-mail: uri.gneezy.gsb.uchicago.edu). I thank Douglas Bernheim and two anonymous reviewers for insightful comments that considerably improved the paper. I also thank Andreas Blume, Gary Charness, Rachel Croson, Martin Dufwenberg, Georg Kirchsteiger, David Levine, Muriel Niederle, Yuval Rottenstreich, Maurice Schweitzer, Richard Thaler, George Wu, and seminar participants at numerous universities for their comments and suggestions. Ira Leybman provided valuable help in running the experiment. I became interested in deception when my father was terminally ill and his physicians created in him a belief that they considered to be untrue. I dedicate this paper to his memory. 1 Important deviations from this assumption in economic modeling are found in Kenneth Arrow’s (1972) discussion of trust, Gary Becker’s (1976) modeling of altruistic preferences, and Akerlof’s (1982) study of the fair-wage hypothesis. For a general discussion, see Becker (1993): “The economic approach I refer to does not assume that individuals are motivated solely by selfishness or material gain. It is a method of analysis, not an assumption about particular motivations. Along with others, I have tried to pry economists away from narrow assumptions about self-interest. Behavior is driven by a much richer set of values and preferences” (p. 385). 2 Note that this does not mean that a completely selfish person will always lie. There may be strategic reasons not to lie. For example, see the David Kreps and Robert Wilson (1982) discussion of reputation and imperfect information; see also Vincent P. Crawford (2003). 3 Cited by his secretary, in a letter in Max Lenz, ed., Briefwechsel Landgraf Phillips des Grossmuthigen von Hessen mit Bucer, Vol. 1.

Deception: The Role of Consequences

https://dspace.mit.edu/bitstream/handle/1721.1/99175/Hanlon_A%20review%20of%20tax%20research.pdf;sequence=1

Michael G. Allingham

Papers

Income tax evasion: a theoretical analysis

Inequality and progressive taxation : An example