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A Structural Labor Supply Model with Nonparametric Preferences

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  • Soest, A.H.O. van
  • Das, J.W.M.
  • Gong, X.

    (Tilburg University, Center for Economic Research)

Abstract

Nonparametric techniques are usually seen as a statistic device for data description and exploration, and not as a tool for estimating models with a richer economic structure, which are often required for policy analysis.This paper presents an example where nonparametric flexibility can be attained in a fully structural model.A structural labour supply model with a nonparametric specification of preferences is introduced, which can be used for the analysis of all sorts of (non-linear) tax and benefits changes.Moreover, the model can deal with several other problems in estimation of structural labour supply models, such as non-convex tax rules, benefits, unobserved wages of non-workers, and model coherency.The utility maximization problem is solved by discretizing the budget set and choosing the optimal leisure and income combination from a finite set of alternatives.The direct utility function is approximated with a series expansion.For a given length of the expansion, the model is estimated by smooth simulated maximum likelihood.The wage equation is estimated jointly with the labour supply model, and measurement errors in wage rates are allowed for. The model is estimated with Dutch data on labour supply of married females, for various lengths of the series expansion.Estimates of labour supply elasticities and effects of a proposed tax reform suggest that the results do not change much once the order of the series expansion is extended beyond two, even though the second order model is statistically rejected against higher order models.Monte Carlo simulations are used to show that the estimation strategy has remarkably good finite sample properties for the size of our sample.On the other hand they lead to some concern about the potential bias to measurement error in the hours variable.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2000-60.

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Date of creation: 2000
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Handle: RePEc:dgr:kubcen:200060

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References

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  1. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers W98/18, Institute for Fiscal Studies.
  2. Keane, Michael & Moffitt, Robert, 1998. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 553-89, August.
  3. Kapteyn, A. & Soest, A.V. & Woittiez, I., 1989. "Labour Supply, Income Taxes And Hours Restrictions In The Netherlands," Papers 8903, Tilburg - Center for Economic Research.
  4. Gallant, A Ronald & Nychka, Douglas W, 1987. "Semi-nonparametric Maximum Likelihood Estimation," Econometrica, Econometric Society, vol. 55(2), pages 363-90, March.
  5. Soest, A.H.O. van & Das, J.W.M., 2000. "Family Labor Supply and Proposed Tax Reforms in the Netherlands," Discussion Paper 2000-20, Tilburg University, Center for Economic Research.
  6. Blomquist, Sören & Newey, Whitney, 1997. "Nonparametric Estimation of Labor Supply Functions Generated by Piece Wise Linear Budget Constraints," Working Paper Series 1997:24, Uppsala University, Department of Economics.
  7. Moffitt, Robert, 1984. "The Estimation of a Joint Wage-Hours Labor Supply Model," Journal of Labor Economics, University of Chicago Press, vol. 2(4), pages 550-66, October.
  8. Soest, A.H.O. van & Kapteyn, A.J. & Kooreman, P., 1993. "Coherency and regularity of demand systems with equality and inequality constraint," Open Access publications from Tilburg University urn:nbn:nl:ui:12-364384, Tilburg University.
  9. Vassilis A. Hajivassiliou and Paul A. Ruud., 1993. "Classical Estimation Methods for LDV Models Using Simulation," Economics Working Papers 93-219, University of California at Berkeley.
  10. Moffitt, Robert, 1990. "The Econometrics of Kinked Budget Constraints," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 119-39, Spring.
  11. Euwals, R.W. & Soest, A.H.O. van, 1996. "Desired and Actual Labour Supply of Unmarried Men and Women in the Netherlands," Discussion Paper 1996-23, Tilburg University, Center for Economic Research.
  12. Thomas MaCurdy & David Green & Harry Paarsch, 1990. "Assessing Empirical Approaches for Analyzing Taxes and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 415-490.
  13. Van Soest, A., 1992. "Discrete Choice Models of Family Labour Supply," Papers 9214, Tilburg - Center for Economic Research.
  14. Moffitt, Robert, 1986. "The Econometrics of Piecewise-Linear Budget Constraints: A Survey and Exposition of the Maximum Likelihood Method," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(3), pages 317-28, July.
  15. Heckman, James J, 1979. "Sample Selection Bias as a Specification Error," Econometrica, Econometric Society, vol. 47(1), pages 153-61, January.
  16. Dickens, William T & Lundberg, Shelly J, 1993. "Hours Restrictions and Labor Supply," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(1), pages 169-92, February.
  17. Tim Callan & Arthur Van Soest, 1996. "Family Labour Supply and Taxes in Ireland," Papers WP078, Economic and Social Research Institute (ESRI).
  18. Hausman, Jerry A, 1985. "The Econometrics of Nonlinear Budget Sets," Econometrica, Econometric Society, vol. 53(6), pages 1255-82, November.
  19. Blundell, Richard & Walker, Ian, 1986. "A Life-Cycle Consistent Empirical Model of Family Labour Supply Using Cross-Section Data," Review of Economic Studies, Wiley Blackwell, vol. 53(4), pages 539-58, August.
  20. Blomquist, Soren, 1996. "Estimation methods for male labor supply functions How to take account of nonlinear taxes," Journal of Econometrics, Elsevier, vol. 70(2), pages 383-405, February.
  21. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
  22. Killingsworth, Mark R. & Heckman, James J., 1987. "Female labor supply: A survey," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 2, pages 103-204 Elsevier.
  23. repec:fth:stanho:e-90-11 is not listed on IDEAS
  24. Pollak, Robert A & Wales, Terence J, 1979. "Welfare Comparisons and Equivalence Scales," American Economic Review, American Economic Association, vol. 69(2), pages 216-21, May.
  25. Blomquist, Soren, 1995. "Restrictions in labor supply estimation: Is the MaCurdy critique correct?," Economics Letters, Elsevier, vol. 47(3-4), pages 229-235, March.
  26. Soest, A.H.O. van & Woittiez, I.B. & Kapteyn, A.J., 1989. "Labour supply, income taxes and hours restrictions in the Netherlands," Discussion Paper 1989-3, Tilburg University, Center for Economic Research.
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Citations

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Cited by:
  1. Anil Kumar, 2005. "Nonparametric estimation of the impact of taxes on female labor supply," Working Papers 0505, Federal Reserve Bank of Dallas.
  2. repec:ese:emodwp:em2-11 is not listed on IDEAS
  3. Olivier Bargain, 2004. "On modeling household labor supply with taxation," DELTA Working Papers 2004-14, DELTA (Ecole normale supérieure).
  4. Bargain, Olivier, 2009. "Flexible Labor Supply Models," IZA Discussion Papers 4281, Institute for the Study of Labor (IZA).
  5. Bargain, Olivier & Dolls, Mathias & Neumann, Dirk & Peichl, Andreas & Siegloch, Sebastian, 2011. "Tax-Benefit Systems in Europe and the US: Between Equity and Efficiency," IZA Discussion Papers 5440, Institute for the Study of Labor (IZA).

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