Do Entrepreneurs Under-report Their Income?

Entrepreneurs have arguably greater scope compared to wage earners to under-report their incomes. Current paper uses data drawn from the Household, Income and Labour Dynamics in Australia Survey (HILDA1) for the years 2001 and 2003-2005 to investigate the degree of self-employment income under-reporting. A method applied is an expenditure based approach developed by Pissarides and Weber (1989). A key idea is that under-reporting of incomes among entrepreneurs would be detectable in the data by using food expenditure equations. The results reveal that households headed by self-employed individuals under-report their incomes by approximately 14-89 per cent. Under-reporting appears to be much more prevailing between entrepreneurs involved in unincorporated business than those involved in incorporated business