On the role of unobserved preference heterogeneity in discrete choice models of labour supply
AbstractThe aim of this paper is to analyse the role of unobserved preference heterogeneity in structural discrete choice models of labour supply. Within this framework, unobserved heterogeneity has been estimated either parametrically or semiparametrically through random coefficient models. Nevertheless, the estimation of such models by means of standard, gradient-based methods is often difficult, in particular if the number of random parameters is high. For this reason, the role of unobserved taste variability in empirical studies is often constrained since only a small set of coefficients is assumed to be random. However, this simplification may affect the estimated labour supply elasticities and the subsequent policy recommendations. In this paper, we propose a new estimation method based on an EM algorithm that allows us to fully consider the effect of unobserved heterogeneity nonparametrically. Results show that labour supply elasticities and other post-estimation results change significantly only when unobserved heterogeneity is considered in a more flexible and comprehensive manner. Moreover, we analyse the behavioural effects of the introduction of a working-tax credit scheme in the Italian tax-benefit system and show that the magnitude of labour supply reactions and the post-reform income distribution can differ significantly depending on the specification of unobserved heterogeneity.
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Bibliographic InfoPaper provided by Universita di Modena e Reggio Emilia, Dipartimento di Economia Politica in its series Center for the Analysis of Public Policies (CAPP) with number 0071.
Date of creation: May 2010
Date of revision:
behavioural microsimulation; labour supply; unobserved heterogeneity; random coefficient mixed models; EM algorithm;
Other versions of this item:
- Daniele Pacifico, 2013. "On the role of unobserved preference heterogeneity in discrete choice models of labour supply," Empirical Economics, Springer, vol. 45(2), pages 929-963, October.
- J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
- H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
- H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
- C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-08-14 (All new papers)
- NEP-DCM-2010-08-14 (Discrete Choice Models)
- NEP-ECM-2010-08-14 (Econometrics)
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- André De Palma & Nathalie Picard & Ignacio Inoa, 2013.
"Discrete Choice Decision-Making with Multiple Decision Makers within the Household,"
- Nathalie Picard & André de Palma & Ignacio A. Inoa, 2013. "Discrete Choice Decision-Making with Multiple Decision Makers within the Household," THEMA Working Papers 2013-03, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
- Lars Kunze & Nicolai Suppa, 2013. "Job Characteristics and Labour Supply," Ruhr Economic Papers 0418, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
- Kabatek, J., 2013. "Iteration Capping For Discrete Choice Models Using the EM Algorithm," Discussion Paper 2013-019, Tilburg University, Center for Economic Research.
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