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Equilibrium policy simulations with random utility models of labour supply

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  • Ugo Colombino

Abstract

Many microeconometric models of discrete labour supply include alternative-specific constants meant to account for (possibly besides other factors) the density or accessibility of particular types of jobs (e.g. parttime jobs vs. full-time jobs). The most common use of these models is the simulation of tax-transfer reforms. The simulation is usually interpreted as a comparative static exercise, i.e. the comparison of different equilibria induced by different policy regimes. The simulation procedure, however, typically keeps fixed the estimated alternative-specific constants. In this note we argue that this procedure is not consistent with the comparative statics interpretation. Equilibrium means that the number of people willing to work on the various job types must be equal to the number of available jobs. Since the constants reflect the number of jobs and since the number of people willing to work change as a response to the change in tax-transfer regime, it follows that the constants should also change. A structural interpretation of the alternative-specific constants leads to the development of a simulation procedure consistent with the comparative static interpretation. The procedure is illustrated with an empirical example.

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Bibliographic Info

Paper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 156.

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Length: 14 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:cca:wpaper:156

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Keywords: Random Utility; Discrete Choice; Labour Supply; Simulation of tax reforms; Alternative-specific constants; Equilibrium simulation;

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  1. Ugo Colombino, 2010. "Equilibrium policy simulations with random utility models of labour supply," Carlo Alberto Notebooks 156, Collegio Carlo Alberto.
  2. John Creedy & Alan Duncan, 2001. "Aggregating Labour Supply And Feedback Effects In Microsimulation," Department of Economics - Working Papers Series 823, The University of Melbourne.
  3. John K. Dagsvik & Steinar Strøm, 2004. "Sectoral Labor Supply, Choice Restrictions and Functional Form," Discussion Papers 388, Research Department of Statistics Norway.
  4. Rolf Aaberge & Ugo Colombino, 2012. "Accounting for family background when designing optimal income taxes: a microeconometric simulation analysis," Journal of Population Economics, Springer, vol. 25(2), pages 741-761, January.
  5. Ugo Colombino, 2011. "Five issues in the design of income support mechanisms. The case of Italy," CHILD Working Papers wp21_11, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  6. Sutherland, Holly, 2001. "EUROMOD: an integrated European benefit-tax model: final report," EUROMOD Working Papers EM9/01, EUROMOD at the Institute for Social and Economic Research.
  7. Dagsvik, John K, 2000. "Aggregation in Matching Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 27-57, February.
  8. Colombino Ugo & Locatelli Marilena & Narazani Edlira & O'Donoghue Cathal, 2010. "Alternative Basic Income Mechanisms: An Evaluation Exercise With a Microeconometric Model," Basic Income Studies, De Gruyter, vol. 5(1), pages 1-31, September.
  9. Rolf Aaberge & Ugo Colombino, 2011. "Empirical Optimal Income Taxation: A Microeconometric Application to Norway," CHILD Working Papers wp16_11, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  10. Dagsvik, John K, 1994. "Discrete and Continuous Choice, Max-Stable Processes, and Independence from Irrelevant Attributes," Econometrica, Econometric Society, vol. 62(5), pages 1179-1205, September.
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Cited by:
  1. Colombino Ugo, 2010. "Equilibrium policy simulations with random utility models of labour supply," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201015, University of Turin.
  2. Colombino, Ugo, 2011. "Five Issues in the Design of Income Support Mechanisms: The Case of Italy," IZA Discussion Papers 6059, Institute for the Study of Labor (IZA).
  3. Colombino Ugo, 2011. "Designing a universal income support mechanism for Italy.An exploratory tour," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201112, University of Turin.

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