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Equilibrium Policy Simulations with Random Utility Models of Labour Supply

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  • Colombino, Ugo

    ()
    (University of Turin)

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. part-time 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 Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5262.

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Length: 15 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:iza:izadps:dp5262

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Keywords: alternative-specific constants; simulation of tax reforms; labour supply; discrete choice; random utility; equilibrium simulation;

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References

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  1. Colombino, Ugo, 2010. "Equilibrium Policy Simulations with Random Utility Models of Labour Supply," IZA Discussion Papers 5262, Institute for the Study of Labor (IZA).
  2. 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.
  3. Rolf Aaberge & Ugo Colombino, 2010. "Accounting for Family Background when Designing Optimal Income Taxes. A Microeconometric Simulation Analysis," Discussion Papers 619, Research Department of Statistics Norway.
  4. John Creedy & Alan Duncan, 2001. "Aggregating Labour Supply and Feedback Effects in Microsimulation," Melbourne Institute Working Paper Series wp2001n15, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  5. 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.
  6. Dagsvik, John K. & Strøm, Steinar, 2004. "Sectoral labor supply, choice restrictions and functional form," Memorandum 13/2004, Oslo University, Department of Economics.
  7. Ugo Colombino & Marilena Locatelli & Edlira Narazani & Cathal O’Donoghue, 2010. "Alternative Basic Income Mechanisms: An Evaluation Exercise with a Microeconometric Model," CHILD Working Papers, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY wp04_10, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  8. Dagsvik, John K, 1994. "Discrete and Continuous Choice, Max-Stable Processes, and Independence from Irrelevant Attributes," Econometrica, Econometric Society, Econometric Society, vol. 62(5), pages 1179-1205, September.
  9. Rolf Aaberge & Ugo Colombino, 2011. "Empirical Optimal Income Taxation: A Microeconometric Application to Norway," CHILD Working Papers, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY wp16_11, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  10. 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).
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Cited by:
  1. Colombino, Ugo, 2012. "Equilibrium policy simulation with random utility models of labor supply," EUROMOD Working Papers EM5/12, EUROMOD at the Institute for Social and Economic Research.
  2. Ugo Colombino, 2011. "Five issues in the design of income support mechanisms. The case of Italy," CHILD Working Papers, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY wp21_11, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  3. Colombino Ugo & Narazani Edlira, 2013. "Designing a Universal Income Support Mechanism for Italy: An Exploratory Tour," Basic Income Studies, De Gruyter, vol. 8(1), pages 1-17, July.

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