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The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased Author info | Abstract | Publisher info | Download info | Related research | Statistics David Domeij (Stockholm School of Economics)
Martin Floden (Stockholm School of Economics)
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The intertemporal labor-supply elasticity is often a central element in macroeconomic analysis. We argue that assumptions underlying previous econometric estimates of the labor supply elasticity are inconsistent with incomplete-markets economies. In particular, if the econometrician ignores borrowing constraints, the elasticity will be biased downwards. We assess this bias using artificial data generated by a model in which we know the true elasticity and real-world data from the Panel Study of Income Dynamics. When applying standard econometric methods on the artificial data, we estimate an elasticity that is 50 percent lower than the true elasticity. We find evidence of a similar bias when using real-world data. (Copyright: Elsevier)
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics .
Volume (Year): 9 (2006)
Issue (Month): 2 (April)
Pages: 242-262
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Handle: RePEc:red:issued:v:9:y:2006:i:2:p:242-262Contact details of provider: Postal: Review of Economic Dynamics Academic Press Editorial Office 525 "B" Street, Suite 1900 San Diego, CA 92101 Fax: 1-860-486-4463 Email: Web page: http://www.EconomicDynamics.org/review.htm More information through EDIRC
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Keywords: Keywords: Frisch labor-supply elasticity ; Liquidity constraint ; Panel Study of Income Dynamics ; Monte Carlo experiment ; Other versions of this item:
Find related papers by JEL classification: E24 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
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