A large literature shows that the self-employed underreport their income to tax authorities. In this paper, we quantify the extent to which the self-employed also systematically underreport their income in U.S. household surveys. We use the Engel curve describing the relationship between income and expenditures of wage and salary workers to infer the actual income, and thus the reporting gap, of the self-employed based on their reported expenditures. On average, the self-employed underreport their income by about 25%. We show that failing to account for such income underreporting leads to biased conclusions in a variety of settings.

Not properly accounting for differences between business owners and nonbusiness owners in studies of household wealth can lead to erroneous conclusions about the significance of different saving motives. Using data from the Panel Study of Income Dynamics from the 1980s and 1990s, we show that within samples of both business owners and non–business owners, the amount of precautionary savings with respect to labor income risk is modest and accounts for less than 10% of total household wealth. Previous large estimates of the size of precautionary balances resulted from pooling these two groups together. Such pooling is inappropriate given that business owners face higher labor risk and accumulate more wealth than non–business owners for reasons unrelated to precautionary motives.

This paper analyzes differences in the likelihood that black and white families become homeowners. By following a sample of black and white renters over time, we are able to separately study racial differences in the likelihood of applying for a mortgage and in the likelihood that a mortgage application is accepted. Although its effect on the race gap in housing transitions is small, we find strong evidence that black applicants are almost twice as likely as comparable white households to be rejected, even when credit history proxies and measures of household wealth are accounted for. We show that the housing transition gap exists primarily because blacks are less likely to apply for mortgages in the first place. The analysis suggests that differences in income, family structure, and in the ability and willingness of parents to provide down-payment assistance are the primary reasons for this applications gap. We speculate that the portion of the gap that remains unexplained after controlling for income, demographics, and wealth may be the result of blacks anticipating a greater chance of rejection when they apply for mortgages.