Economics Research

Abstract Underground economy has various names in economics literature like, black economy, unregulated economy, and unreported economy and so on. Since there is no exact definition for the Underground economy, in this study we try to measure it indirectly by using the observable variables and build a model to explain it. Then we try to estimate the model by Maximum likelihood and Instrumental Variable methods. The aim of this paper is to estimate the size of the Underground economy in Iran by using the unobservable variable model (Multiple indicator and multiple causes). Our estimates show that the share of the Underground economy in Iran was about 17.21 percent of the Gross Domestic Product (GDP) during 1350-1386. Our result also indicates that the tax Gap was about 22 percent of the total tax revenue for the above-mentioned period. For a number of reasons, which will be discussed later in the main text, the size of the Underground economy and tax gap is increasing for the foreseeable future in the economy of Iran.