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On Modeling Household Labor Supply With Taxation

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Author Info
Olivier Bargain (University College of Dublin)

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Abstract

Discrete choice models of labor supply easily account for nonlinearity and nonconvexity in budget sets caused by tax-benefit systems. As a result, they have become very popular for ex ante evaluations of policy reforms. In this paper, we question whether the degree of flexibility and the implicit household representation in these models are satisfying when confronted to the data. First, we show that attempts to interpret discrete models structurally lead to unnecessary parametric restrictions in most studies. We suggest instead a fully flexible model that retains usual assumptions on economic rationality except regularity conditions on leisure. Indeed, coefficients may account for both tastes and costs of work, possibly making 'preferences' appear nonconvex. Second, we show that the static unitary representation, implicit in most tax policy analyses, is rejected against a more general model with price- and income- dependent preferences. The latter can be rationalized in terms of collective or intertemporal models and offers promising perspectives in these directions. Simulations show that the magnitude of predicted labor supply responses to tax-benefit reforms is sensitive to the underlying household representation.

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Paper provided by School Of Economics, University College Dublin in its series Working Papers with number 200711.

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Length: 23 pages
Date of creation: 16 Aug 2007
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Handle: RePEc:ucn:wpaper:200711

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Related research
Keywords: multinomial logit; household labor supply; tax reform; 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. François Bourguignon & Amedeo Spadaro, 2006. "Microsimulation as a tool for evaluating redistribution policies," Journal of Economic Inequality, Springer, vol. 4(1), pages 77-106, April. [Downloadable!] (restricted)
    Other versions:
  2. François Bourguignon & Amedeo Spadaro, 2005. "Tax-benefit revealed social preferences," PSE Working Papers 2005-22, PSE (Ecole normale supérieure). [Downloadable!]
    Other versions:
  3. Reto Nyffeler, 2005. "Different Modeling Strategies for Discrete Choice Models of Female Labour Supply: Estimates for Switzerland," Diskussionsschriften dp0508, Universitaet Bern, Departement Volkswirtschaft. [Downloadable!]
  4. 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!]
  5. 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:
  6. 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:
  7. 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:
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