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Quadratic utility, labour supply and the welfare effects of tax changes

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  • John Creedy

    ()
    (University of Melbourne)

Abstract

This paper examines the use of the quadratic direct utility function in modelling labour supply behaviour. This function has been used in recent empirical studies of labour supply. Emphasis is given to the treatment of welfare changes, involving the derivation of the expenditure function. A convenient expression for the Slutsky condition is also obtained. In examining welfare changes, special attention is given to possible movements to or from corner solutions, since these involve the use of virtual wages rather than observed net wages. In addition, changes in tax parameters can have income and price effects, in view of the endogeneity of the net (or virtual) wage rate and virtual income when faced with piecewise-linear budget constraints. Numerical examples illustrate the effects of tax changes on compensating and equivalent variations.

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Bibliographic Info

Article provided by Bankwest Curtin Economics Centre (BCEC), Curtin Business School in its journal Australian Journal of Labour Economics.

Volume (Year): 4 (2000-2001)
Issue (Month): 4 (December)
Pages: 270-278

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Handle: RePEc:ozl:journl:v:4:y:2001:i:4:p:270-278

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Web page: http://business.curtin.edu.au/research/publications/journals/ajle/
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Keywords: Time allocation and labour supply (hours of work; part-time employment; work sharing; absenteeism;

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Cited by:
  1. John Creedy & Guyonne Kalb, 2001. "Measuring Welfare Changes With Nonlinear Budget Constraints in Continuous and Discrete Hours Labour Supply Models," Melbourne Institute Working Paper Series wp2001n09, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  2. John Creedy & Nicolas Herault & Guyonne Kalb, 2008. "Comparing Welfare Change Measures withIncome Change Measures in Behavioural Policy Simulations," Department of Economics - Working Papers Series 1030, The University of Melbourne.

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