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On Modeling Household Labor Supply with Taxation

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Author Info
Bargain, Olivier () (IZA Bonn and DELTA, Paris)

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Abstract

Discrete-choice models provide a simple way of representing utility-maximizing labor supply decisions in the presence of highly nonlinear and possibly non-convex budget constraints. Thus, it is not surprising that they are so extensively used for ex-ante evaluation of taxbenefit reforms. The question asked in this paper is whether it is possible and desirable to get still more flexibility by relaxing some of the usual constraints imposed on household preferences and rationality. We first suggest a model which attains flexibility by making parameters vary freely across hours choices. By embedding the traditional structural approach in this specification, it is shown that the restrictions on underlying well-behaved leisure-consumption preferences are rejected. More fundamentally still, the standard approach, i.e., the assumption of unitary households optimizing statically, is strongly rejected when tested against a general model with price- and income-dependent preferences. In a static environment, the result boils down to a rejection of the unitary model. Interestingly, restrictions from both structural and standard models also imply important discrepancies in estimated elasticities and simulated predictions of responses to a tax reform. In particular, large differences appear between standard models and the general model which possibly encompasses several interpretations including dynamic aspects and intrahousehold negotiation. These findings illustrate the difficulty to conduct policy analysis in a way which reconciles the best explanatory power and a framework consistent with economic theory. The general model we suggest may provide future research with an interesting setting to test some of the dimensions of household behavior.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1455.

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Length: 36 pages
Date of creation: Jan 2005
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Handle: RePEc:iza:izadps:dp1455

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Related research
Keywords: multinomial logit; household labor supply; taxation; microsimulation; unitary model; collective model;

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Find related papers by JEL classification:
C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models
C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation and Testing
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Arntz, Melanie & Boeters, Stefan & Gürtzgen, Nicole & Schubert, Stefanie, 2006. "Analysing welfare reform in a microsimulation-AGE model : the value of disaggregation," ZEW Discussion Papers 06-76, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
    Other versions:
  2. François Bourguignon & Amedeo Spadaro, 2005. "Microsimulation as a tool for evaluating redistribution policies," PSE Working Papers 2005-02, PSE (Ecole normale supérieure). [Downloadable!]
    Other versions:
  3. François Bourguignon & Amedeo Spadaro, 2005. "Tax-benefit revealed social preferences," PSE Working Papers 2005-22, PSE (Ecole normale supérieure). [Downloadable!]
    Other versions:
  4. Olivier Bargain & Kristian Orsini, 2004. "In-work policies in Europe: killing two birds with one stone?," DELTA Working Papers 2004-13, DELTA (Ecole normale supérieure). [Downloadable!]
    Other versions:
  5. Michiel Evers & Ruud A. de Mooij & Daniel J. van Vuuren, 2006. "What explains the Variation in Estimates of Labour Supply Elasticities?," Tinbergen Institute Discussion Papers 06-017/3, Tinbergen Institute. [Downloadable!]
    Other versions:
  6. Reto Nyffeler, 2005. "Different Modeling Strategies for Discrete Choice Models of Female Labour Supply: Estimates for Switzerland," Diskussionsschriften dp0508, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
  7. Melanie Arntz & Stefan Boeters & Nicole Gürtzgen & Stefanie Schubert, 2006. "Analysing Welfare Reform in a Microsimulation-AGE Model," Computing in Economics and Finance 2006 109, Society for Computational Economics. [Downloadable!]
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