Decomposing the Grey Economy in Bulgaria: A General-Equilibrium Analysis

  • Aleksander VASILEV Lincoln International Business School, UK


This paper attempts to assess the size of the grey economy, and provide a decomposition by evasion type. The modelling approach utilizes a standard micro- founded general-equilibrium setup, which is augmented with a revenue-extraction mech- anism and a government sector. The model is calibrated to Bulgaria after the intro- duction of the currency board (1999-2018). A computational experiment performed within this setup estimates that on average, the size of total evasion is a bit more than one-fourth of output, an estimate which is in line with the figures provided in both Philip (2014) and the European Commission (2014). Two-thirds of the model- predicted evasion is a combined result of income- and social security evasion, while the rest is due to VAT evasion.


[1]. Allingham, M.G., and Sandmo, A. (1972) "Income tax evasion: a theoretical analysis," Journal of Public Economics 1(3): 323-338.
[2]. Angelopoulos, K., Economides, G., and V. Vassilatos. (2011) "Do institutions matter for economic fluctuations? Weak property rights in a business cycle model for Mexico," Review of Economic Dynamics 14(3): 511-531.
[3]. Angelopoulos, K., Philippopoulos, A., and V. Vassilatos. (2009) "The Social Cost of Rent-Seeking in Europe," European Journal of Political Economy 25(2): 280-299.
[4]. Bulgarian National Bank (2020) Bulgarian National Bank Statistics. Available on-line at Accessed on Aug. 21, 2020.
[5]. Center for the Study of Democracy (2015) Hidden Economy Indexes in Bulgaria 2002-2015: Results and Methodological Notes, Sofia, Bulgaria.
[6]. De Melo, J., Roland-Holst D., and M. Haddad (1992) "Tax Evasion and Tax Reform in a Low-Income Economy: General-Equilibrium Estimates for Madagascar," World Bank Policy Paper 918, Washington DC.
[7]. Di Nola, A., Kocharkov, G., Scholl, A., and Tkhir, A.-M. (2021) "The Aggregate Consequences of Tax Evasion," Review of Economic Dynamics 40: 198-227.
[8]. Di Nola, A., Kocharkov, G. and A. Vasilev (2019) "EnvelopeWages, Hidden Production and Labor Productivity," B.E. Journal of Macroeconomics (Advances)19(2): 1-30.
[9]. European Commission (2014) Special Eurobarometer 402: Undeclared Work, Brussels: European Commission.
[10]. National Statistical Institute (2020) Aggregate Statistical Indicators. Available on-line at Accessed on Feb. 28, 2020.
[11]. Philip, L.R. (2014) "The grey economy of post-communist new EU member states: case of Bulgaria," Horizons of Politics, Vol. 5, No. 13, 91-112.
[12]. Schneider, F. and Medina, L. (2018) Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?, IMF Working Paper 18/17.
[13]. Schneider, F. and D. Enste (2013) The Shadow Economy: An International Survey, Cambridge University Press: Cambridge, UK.
[14]. Vasilev, A. (2018) "Is consumption-Laffer curve hump-shaped? The role of VAT evasion," Journal of Economic Studies 45(3): 598-609.
[15]. Vasilev, A. (2017a). "VAT Evasion in Bulgaria: A General-Equilibrium," Review of Economics and Institutions 8(2), Article 2. doi: 10.5202/rei.v8i2.243.
[16]. Vasilev, A. (2017b). "On the cost of Opportunistic Behavior in the Public Sector: A General-Equilibrium Approach," Journal of Public Economic Theory 19, 565-582.
[17]. Vasilev, A. (2015a) "The flat tax reform in Bulgaria and the size of the informal sector," Economic Change and Restructuring, 48(2): 169-185.
[18]. Vasilev, A. (2015b) "Welfare effects of at income tax reform: the case of Bulgaria," Eastern European Economics 53(2): 205-220.
[19]. Vasilev, A. (2009) "Business cycles in Bulgaria and the Baltic countries: an RBC approach," International Journal of Computational Economics and Econometrics, 1(2): 148-170.
[20]. Williams, C. (2008) "Envelope Wages in Central and Eastern Europe and the EU," Post-Communist Economies 20 (3): 363-376.
How to Cite
VASILEV, Aleksander. Decomposing the Grey Economy in Bulgaria: A General-Equilibrium Analysis. Journal of Mathematical Economics and Finance, [S.l.], v. 8, n. 2, p. 7 - 23, dec. 2022. ISSN 2458-0813. Available at: <>. Date accessed: 19 june 2024. doi: