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A Discrete Choice Approach to Estimating Workers' Marginal Valuation of Fringe Benefits

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  • Anne Beeson Royalty

Abstract

May 1998 (Revised May 2000) This paper offers a new way of estimating workers' valuation of fringe benefits using data on workers' choices among fringe benefits packages offered by the employer. This approach overcomes both the omitted variable problem and the identification problem that bias estimates of compensating differentials and supply and demand parameters for fringe benefits from the traditional hedonic model most frequently used to analyze this problem. With this approach, the observed choice among offered fringe benefits packages which require different employee contributions and receive different employer subsidies conveys information about how much in wages workers are willing to give up to obtain additional firm dollars in the form of fringe benefits. That is the valuation of fringe benefits that we want to estimate. The comparison among alternatives implicit in the discrete choice method differences away fixed unobservable individual productivity differences that are believed to be the main problem in estimating compensating differentials and lessens the endogeneity problems that arise in estimating hedonic demand parameters. Variation in the offered wage-fringe price across firms identifies workers' valuation of fringe dollars, serving the same function as the sometimes arbitrary market boundaries that must be imposed in the hedonic model to achieve identification. Exploratory empirical results using grouped firm data on choices of alternative health insurance plans provide support for the proposed approach. Unlike most estimates of compensating differentials for fringe benefits, the estimates are of the correct sign. The results suggest that families value health benefits substantially more than singles and that that valuation of fringe benefits dollars is substantially less than one-for-one with wage dollars.

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 98008.

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Handle: RePEc:wop:stanec:98008

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  1. Abowd, J.M. & Kramarz, F. & Margolis, D.N., 1995. "High-Wage Workers and High-Wage Firms," Cahiers de recherche 9503, Universite de Montreal, Departement de sciences economiques.
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  6. Steven T. Berry, 1994. "Estimating Discrete-Choice Models of Product Differentiation," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 242-262, Summer.
  7. Berry, Steven & Levinsohn, James & Pakes, Ariel, 1995. "Automobile Prices in Market Equilibrium," Econometrica, Econometric Society, vol. 63(4), pages 841-90, July.
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  9. James N. Brown & Harvey S. Rosen, 1982. "On the Estimation of Structural Hedonic Price Models," NBER Technical Working Papers 0018, National Bureau of Economic Research, Inc.
  10. Edward B. Montgomery & Kathryn Shaw & Mary Ellen Benedict, 1990. "Pensions and Wages: An Hedonic Price Theory Approach," NBER Working Papers 3458, National Bureau of Economic Research, Inc.
  11. Trajtenberg, Manuel, 1989. "The Welfare Analysis of Product Innovations, with an Application to Computed Tomography Scanners," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 444-79, April.
  12. Rosen, Sherwin, 1974. "Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition," Journal of Political Economy, University of Chicago Press, vol. 82(1), pages 34-55, Jan.-Feb..
  13. Epple, Dennis, 1987. "Hedonic Prices and Implicit Markets: Estimating Demand and Supply Functions for Differentiated Products," Journal of Political Economy, University of Chicago Press, vol. 95(1), pages 59-80, February.
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  15. Kahn, Shulamit & Lang, Kevin, 1988. "Efficient Estimation of Structural Hedonic Systems," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(1), pages 157-66, February.
  16. Thomas J. Nechyba & Robert P. Strauss, 1997. "Community Choice and Local Public Services: A Discrete Choice Approach," NBER Working Papers 5966, National Bureau of Economic Research, Inc.
  17. Hwang, Hae-shin & Reed, W Robert & Hubbard, Carlton, 1992. "Compensating Wage Differentials and Unobserved Productivity," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 835-58, August.
  18. Garen, John, 1988. "Compensating Wage Differentials and the Endogeneity of Job Riskiness," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 9-16, February.
  19. Cropper, Maureen L, et al, 1993. "Valuing Product Attributes Using Single Market Data: A Comparison of Hedonic and Discrete Choice Approaches," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 225-32, May.
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Cited by:
  1. Brigitte C. Madrian, 2005. "The U.S. health care system and labor markets," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 50(Jun), pages 137-163.
  2. Scott Stern, 1999. "Do Scientists Pay to Be Scientists?," NBER Working Papers 7410, National Bureau of Economic Research, Inc.

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