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Evaluating Alternative Representations of the Choice Sets in Models of Labour Supply

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Author Info
Ugo Colombino (CHILD, Department of Economics, Turin, Italy)
Rolf Aaberge (Research Department, Statistics Norway, Oslo, Norway)
Tom Wennemo (Research Department, Statistics Norway, Oslo, Norway)

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Abstract

During the last two decades, the discrete-choice modelling of labour supply decisions has become increasingly popular, starting with Aaberge et al. (1995) and van Soest (1995). Within the literature adopting this approach there are however two potentially important issues that are worthwhile analyzing in their implications and that up to know have not been given the attention that they might deserve. A first issue concerns the procedure by which the discrete alternative are chosen. For example Van Soest (1995) chooses (non probabilistically) a set of fixed points identical for every individual. This is by far the most widely adopted method. By contrast, Aaberge et al. (1995) adopt a sampling procedure and also assume that the choice set may differ across the households. A second issue concerns the availability of the alternatives. Most authors assume all the values of hours-of-work within some range [0, H] are equally available. At the other extreme, some authors assume only two or three alternatives (e.g. non-participation, part-time and full-time) are available for everyone. Aaberge et al. (1995) assume instead that not all the hour opportunities are equally available to everyone; they specify a probability density function of opportunities for each individual and the discrete choice set used in the estimation is built by sampling from that individual-specific density function. In this paper we explore by simulation the implications of - the procedure used to build the choice set (fixed alternatives vs sampled alternatives) - accounting vs not accounting for a different availability of alternatives. The way the choice set is represented seems to have little impact on the fitting of observed values, but a more significant and important impact on the prediction of policy effects.

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Paper provided by EconWPA in its series Econometrics with number 0510001.

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Length: 21 pages
Date of creation: 13 Oct 2005
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Handle: RePEc:wpa:wuwpem:0510001

Note: Type of Document - pdf; pages: 21
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Related research
Keywords: Microeconometric Models; Discrete Choice; Choice Set; Labour Supply; Tax Reforms.;

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Find related papers by JEL classification:
C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General
C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
C5 - Mathematical and Quantitative Methods - - Econometric Modeling
C8 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs

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References listed on IDEAS
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  14. Aaberge, Rolf & Colombino, Ugo & Strom, Steinar, 1999. "Labour Supply in Italy: An Empirical Analysis of Joint Household Decisions, with Taxes and Quantity Constraints," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(4), pages 403-22, July-Aug.. [Downloadable!]
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  1. José M. Labeaga & Xisco Oliver & Amedeo Spadaro, 2005. "Discrete choice models of labour supply, behavioural microsimulation and the Spanish tax reform," PSE Working Papers 2005-13, PSE (Ecole normale supérieure). [Downloadable!]
    Other versions:
  2. Haan, Peter & Navarro, Dolores, 2008. "Optimal Income Taxation of Married Couples: An Empirical Analysis of Joint and Individual Taxation," IZA Discussion Papers 3819, Institute for the Study of Labor (IZA). [Downloadable!]
  3. Colombino U & Locatelli M & Narazani E & O'donoghue C & Shima I, 2008. "Behavioural And Welfare Effects Of Basic Income Policies: A Simulation For European Countries," EUROMOD Working Papers EM5/08, EUROMOD at the Institute for Social and Economic Research. [Downloadable!]
    Other versions:
  4. Peter Haan & Dolores Navarro, 2008. "Optimal Income Taxation of Married Couples: An Empirical Analysis of Joint and Individual Taxation," Discussion Papers of DIW Berlin 838, DIW Berlin, German Institute for Economic Research. [Downloadable!]
  5. Aaberge, Rolf & Flood, Lennart, 2008. "Evaluation of an In-Work Tax Credit Reform in Sweden: Effects on Labor Supply and Welfare Participation of Single Mothers," IZA Discussion Papers 3736, Institute for the Study of Labor (IZA). [Downloadable!]
    Other versions:
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