Using Tax Wedge

This study analyzes the relationship between the household's demand for formal services and their close substitutes in the informal economy (including do-it-yourself activities). The tax wedge is included in the analysis as an explanatory variable, which is used as a proxy for the ratio of the formal services prices to the price in the informal market. Using the Iranian macroeconomic time-series data, the Johanson–Juselius cointegration method and error correction model are applied to estimate the demand, and then the long-run price elasticities and tax wedge elasticities calculated. The structural changes due to economic shocks are examined by the estimated model.