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Equilibrium policy simulations with random utility models of labour supply

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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. parttime 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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Paper provided by University of Turin in its series Department of Economics and Statistics Cognetti de Martiis. Working Papers with number 201015.

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Length: 14 pages
Date of creation: Oct 2010
Date of revision:
Handle: RePEc:uto:dipeco:201015

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  1. Colombino Ugo & Locatelli Marilena & Narazani Edlira & O'Donoghue Cathal, 2010. "Alternative Basic Income Mechanisms: An Evaluation Exercise With a Microeconometric Model," Basic Income Studies, De Gruyter, vol. 5(1), pages 1-31, September.
  2. Aaberge, Rolf & Colombino, Ugo, 2009. "Accounting for Family Background when Designing Optimal Income Taxes: A Microeconometric Simulation Analysis," IZA Discussion Papers 4598, Institute for the Study of Labor (IZA).
  3. 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.
  4. Steinar Str�m & John K. Dagsvik, 2006. "Sectoral labour supply, choice restrictions and functional form," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(6), pages 803-826.
  5. 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.
  6. Colombino Ugo, 2010. "Equilibrium policy simulations with random utility models of labour supply," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201015, University of Turin.
  7. Rolf Aaberge & Ugo Colombino, 2011. "Empirical Optimal Income Taxation: A Microeconometric Application to Norway," CHILD Working Papers wp16_11, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  8. John K. Dagsvik, 1996. "Aggregation in Matching Markets," Discussion Papers 173, Research Department of Statistics Norway.
  9. 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).
  10. Dagsvik, John K, 1994. "Discrete and Continuous Choice, Max-Stable Processes, and Independence from Irrelevant Attributes," Econometrica, Econometric Society, vol. 62(5), pages 1179-1205, September.
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Cited by:
  1. Ugo Colombino, 2011. "Five issues in the design of income support mechanisms. The case of Italy," CHILD Working Papers wp21_11, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  2. 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.
  3. Colombino Ugo, 2011. "Designing a universal income support mechanism for Italy.An exploratory tour," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201112, University of Turin.

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