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Measuring welfare changes in behavioural microsimulation modelling: Accounting for the random utility component

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Author Info

  • John Creedy

    (University of Melbourne)

  • Nicolas Hérault

    (University of Melbourne)

  • Guyonne Kalb

    (University of Melbourne)

Abstract

This paper presents a method of predicting individuals’ welfare changes (compensating and equivalent variations) arising from a tax or social security policy change in the context of behavioural microsimulation modelling, where individuals can choose between a limited number of discrete hours of work. The method allows fully for the nonlinearity of the budget constraint facing each individual, the probabilistic nature of the labour supply model and the presence of unobserved heterogeneity in the estimation of preference functions. Yet it is relatively straightforward to implement. An advantage of welfare measures, compared with changes in net incomes, is that they take into account the value of leisure and home production. The method is applied to a hypothetical income tax policy change in Australia.

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Bibliographic Info

Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): XIV (2011)
Issue (Month): (May)
Pages: 5-34

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Handle: RePEc:cem:jaecon:v:14:y:2011:n:1:p:5-34

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Related research

Keywords: welfare change measures; equivalent variation; compensating variation; labour supply modelling; nonlinear budget constraint;

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Cited by:
  1. Shun-ichiro Bessho & Masayoshi Hayashi, 2012. "Should the Japanese Tax System Be More Progressive? An Evaluation Using Simulated SMCFs Based on the Discrete Choice Model of Labor Supply," CIRJE F-Series CIRJE-F-848, CIRJE, Faculty of Economics, University of Tokyo.
  2. Iris Claus & John Creedy & Josh Teng, 2012. "The Elasticity of Taxable Income in New Zealand," Treasury Working Paper Series 12/03, New Zealand Treasury.
  3. John Creedy & Nicolas Hérault†, 2011. "Decomposing Inequality and Social Welfare Changes : The Use of Alternative Welfare Metrics," Department of Economics - Working Papers Series 1121, The University of Melbourne.
  4. Thor O. Thoresen & Zhiyang Jia & Peter J. Lambert, 2013. "Distributional benchmarking in tax policy evaluations," Discussion Papers 765, Research Department of Statistics Norway.

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