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The labor-supply elasticity and borrowing constraints: Why estimates are biased

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Author Info
Domeij, David () (Dept. of Economics, Stockholm School of Economics)
Floden, Martin () (Dept. of Economics, Stockholm School of Economics)

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Abstract

The labor-supply elasticity is a central element in many macroeconomic models. We argue that assumptions underlying previous econometric estimates of the intertemporal labor supply elasticity are inconsistent with incomplete markets economies. In particular, if the econometrician ignores borrowing constraints, the elasticity will be biased downwards. Within our model, the bias may be up to 50 percent. We find a similar bias in PSID data.

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Publisher Info
Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 480.

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Length: 30 pages
Date of creation: 29 Nov 2001
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Publication status: Published in Review of Economic Dynamics, 2006, pages 242-262.
Handle: RePEc:hhs:hastef:0480

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Related research
Keywords: labor supply elasticity intertemporal substitution liquidity constraints

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Find related papers by JEL classification:
C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
E20 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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