Department of Economics

Johannes Kepler University

Dr. Friedrich Schneider

Beschreibung meiner Forschungsfelder/Description of my major research areas

  1. Public Choice/Constitutional Economics
  2. Public Finance/Shadow Economy/Tax Evasion and Related Areas

The research from these fields deals with economic policy questions, mostly in highly developed OECD countries and cover in some parts also developing countries. The main focus is the analyses of state activities (in a broad sense) and their consequences on the economy.

(1) Public Choice/Constitutional Economics

Since over 30 years I’m doing research with various coauthors (B.S. Frey, G. Kirchgaessner, W.W. Pommerehne, H. Weck-Hannemann, L. Feld and others) in the area of Public Choice. Public Choice deals with the behaviour of governments (politicians), parties, voters, bureaucracies and interest groups (and others) using the economic approach of selfish utility maximizing of individuals subject to constraints. My research uses Public Choice analyses of voters’ and government’s behaviour in representative democracies. I demonstrated that at general elections the voters behaviour is systematically influenced by the economic situation and that a government, who knows this, systematically tries to influence the economy in such a way that its re-election chance is raising.

I also analysed this relationship for the case of direct democracy in Switzerland using the median voter model. I did also studies about interest group behaviour, where I could demonstrate that due to conflicting interests of the various pressure groups their overall influence is not dominating any government fiscal and monetary policy. Central Bank behaviour was also analysed showing that the institutional arrangements are critical in order to maintain an independent central bank.

I also applied constitutional economics to the problem whether one needs an European Federal Constitution after having created an European Monetary Union. A first draft of an European constitution was developed by an European constitutional group (with me as one member).

The public choice approach was also applied by me to the issue of deregulation and/or privatization in highly developed OECD countries; e.g. calculating the potential size of privatization in Austria.

Lately I used the public choice method to explain why we observed so little use of incentive orientated instruments (emission taxes and tradeable permits) in environmental policy leading to a substitution and not only to revenue creating effect. Jürgen Volkert, Gebhard Kirchgässner, Andrea Kollmann and I showed in several papers that neither voters nor the government are interested in an efficient environmental policy mainly due to the fact that the costs of such an policy have to be carried immediately by the voters and government, but the benefits are effective much later and all are benefiting from them also those who do not bear the costs.

Lately and together with Gebhard Kirchgässner we dealt with two questions, (1) what are the origins of the financial crisis in 2009 and (2) what did economists contribute, or why did economists fail to provide a convincing answer for the origins of the crisis, and possible solutions to overcome it? The economics profession at least in 2009 was unaware of the looming worldwide financial and economic crisis, and significantly underestimated its global dimensions and consequences. A first and preliminary analysis is undertaken to explain reasons for these failures.

(2) Public Finance/Shadow Economy/Tax Evasion and Related Areas

Since over 25 years I’m engaged in mostly empirically orientated research of the shadow economy and tax evasion. My research started with two questions: (1) how to define a shadow (underground, black, cash, parallel, criminal) economy and (2) how to measure the size and development of the shadow economy. Hence, the shadow economy is defined in many ways, but the predominant definition is to compromise all at present not officially recorded productive (i.e. value-adding) activities, which should be part of gross national income.

Economists (including myself) have devised a considerable number of approaches to measure the size and development of the shadow economy and tax evasion. The difficulties in measuring the size and development of the shadow economy and tax evasion was (and still is) a major part of my research since the eighties considering 165 developing, developed and transition countries.

The direct approaches are based on surveys and the examination of tax returns, the indirect approaches analyze the discrepancies between what would be normal and what is actually observed with respect to spending, employment, and the use of money. For the IMF, the World Bank and public institutions in Germany, Austria and Switzerland I have empirically estimated the size and development of the shadow economy of 165 countries over the period 1994 to 2007.

My other major research areas are the consequences of a rising shadow economy and its interaction with the official one. One of my major concern is that due to shadow economy activities, government revenues (from taxation and social security contributions) are (partly) lost. On the other hand, underground activities are value-creating and introduce a dynamic element into the “official” economy; the latter effects I showed in various studies for Germany and Austria.

Furthermore, the interaction of the shadow economy with the official one has been excessively investigated by Dominik Enste and me in a book, appeared by Cambridge University Press, December 2002 and the second edition in 2013. One major finding is that 2/3 of the shadow economy activities are complementary to official activities. Hence the substitution effect between official and shadow economy activities is only 1/3!

Another challenging result is that roughly 66% of the income earned in the shadow economy is spend immediately in the official economy – hence this black money considerably stimulates the official economy and compensates a part of the revenue losses. Another research area is the interaction of the shadow and corruption: Theoretically the question is unsettled whether there is a substitutive or complementary relationship. Empirically this question is preliminary solved; my research with Axel Dreher shows a complementary (substitutive) relationship in developed (developing) countries, but the results are not robust.

Lately, together with Lars Feld we undertook microeconometric investigations why people evade taxes and/or work in the shadow economy.

In addition since the last 6 years I started to do some purely empirically research in the areas of the Economics of Security, Terrorism and Organized Crime.


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