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On Modeling Household Labor Supply with Taxation

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  • Bargain, Olivier

    ()
    (University of Aix-Marseille II)

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 tax-benefit 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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Bibliographic Info

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
Date of revision:
Handle: RePEc:iza:izadps:dp1455

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

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References

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Cited by:
  1. Daniele Pacifico, 2014. "On the role of unobserved preference Heterogeneity in discrete choice Models of labour supply," Working Papers, Department of the Treasury, Ministry of the Economy and of Finance 6, Department of the Treasury, Ministry of the Economy and of Finance.
  2. Arntz, Melanie & Boeters, Stefan & Gürtzgen, Nicole & Schubert, Stefanie, 2008. "Analysing welfare reform in a microsimulation-AGE model: The value of disaggregation," Economic Modelling, Elsevier, Elsevier, vol. 25(3), pages 422-439, May.
  3. Pacifico, Daniele, 2009. "Modelling Unobserved Heterogeneity in Discrete Choice Models of Labour Supply," MPRA Paper 19030, University Library of Munich, Germany.
  4. François Bourguignon & Amedeo Spadaro, 2006. "Microsimulation as a Tool for Evaluating Redistribution Policies," Working Papers 20, ECINEQ, Society for the Study of Economic Inequality.
  5. Bargain, Olivier & Orsini, Kristian, 2004. "In-Work Policies in Europe: Killing Two Birds with One Stone?," IZA Discussion Papers 1445, Institute for the Study of Labor (IZA).
  6. Melanie Arntz & Stefan Boeters & Nicole Gürtzgen & Stefanie Schubert, 2006. "Analysing Welfare Reform in a Microsimulation-AGE Model," Computing in Economics and Finance 2006, Society for Computational Economics 109, Society for Computational Economics.
  7. François Bourguignon & Amedeo Spadaro, 2012. "Tax–benefit revealed social preferences," Journal of Economic Inequality, Springer, Springer, vol. 10(1), pages 75-108, March.
  8. Daniele Pacifico, 2010. "On the role of unobserved preference heterogeneity in discrete choice models of labour supply," Center for the Analysis of Public Policies (CAPP), Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica 0071, Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica.

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