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A new equilibrium simulation procedure with discrete choice models

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  • Ugo Colombine

    (Dipartimento di Economia e Statistica S. Cognetti De Martiis, University of Torino)

Abstract

Many microeconometric models of discrete choice include alternative-specific constants meant to account for (possibly besides other factors) the density or accessibility of particular types of alternatives. A notable area of application is labour supply, where for example part-time jobs vs. full-time jobs might be more or less accessible. The most common use of these models is the simulation of tax-transfer reforms. The simulation is usually interpreted as a comparative statics 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. Since the constants reflect the number of jobs and since the number of people willing to work changes as a response to the change in tax-transfer regime, the new equilibrium induced by the reform implies 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 statics interpretation. The procedure is illustrated with a simulation of alternative reforms of the income support policies in Italy.

Suggested Citation

  • Ugo Colombine, 2013. "A new equilibrium simulation procedure with discrete choice models," International Journal of Microsimulation, International Microsimulation Association, vol. 6(3), pages 25-49.
  • Handle: RePEc:ijm:journl:v:6:y:2013:i:3:p:25-49
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    1. Rolf Aaberge & Ugo Colombino & Steinar Strøm, 2004. "Do more equal slices shrink the cake? An empirical investigation of tax-transfer reform proposals in Italy," Journal of Population Economics, Springer;European Society for Population Economics, vol. 17(4), pages 767-785, December.
    2. Dagsvik, John K, 2000. "Aggregation in Matching Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 27-57, February.
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    4. Steinar StrØm & 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 & Guyonne Kalb, 2005. "Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 697-734, December.
    6. Rolf Aaberge & Ugo Colombino, 2005. "Designing Optimal Taxes With a Microeconometric Model of Household Labour Supply," Public Economics 0510013, University Library of Munich, Germany.
    7. Meade,James Edward, 1995. "Full Employment Regained?," Cambridge Books, Cambridge University Press, number 9780521556972.
    8. 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.
    9. Rolf Aaberge & Ugo Colombino, 2014. "Labour Supply Models," Contributions to Economic Analysis, in: Cathal O’Donoghue (ed.), Handbook of Microsimulation Modelling, volume 127, pages 167-221, Emerald Publishing Ltd.
    10. Tom Kornstad & Thor Thoresen, 2007. "A discrete choice model for labor supply and childcare," Journal of Population Economics, Springer;European Society for Population Economics, vol. 20(4), pages 781-803, October.
    11. Alvin Roth, 2008. "Deferred acceptance algorithms: history, theory, practice, and open questions," International Journal of Game Theory, Springer;Game Theory Society, vol. 36(3), pages 537-569, March.
    12. Rolf Aaberge, 2007. "Gini’s nuclear family," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 5(3), pages 305-322, December.
    13. Colonna, Fabrizio & Marcassa, Stefania, 2012. "Taxation and Labor Force Participation: The Case of Italy," CEPREMAP Working Papers (Docweb) 1203, CEPREMAP.
    14. King, Mervyn A., 1983. "Welfare analysis of tax reforms using household data," Journal of Public Economics, Elsevier, vol. 21(2), pages 183-214, July.
    15. Massimo Baldini & Stefano Toso & Paolo Bosi, 2002. "Targeting welfare in Italy: old problems and perspectives on reform," Fiscal Studies, Institute for Fiscal Studies, vol. 23(1), pages 51-75, March.
    16. Aaberge, Rolf & Dagsvik, John K & Strom, Steinar, 1995. " Labor Supply Responses and Welfare Effects of Tax Reforms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 635-659, December.
    17. 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 403-422, July-Aug..
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    1. Rolf Aaberge & Ugo Colombino, 2014. "Labour Supply Models," Contributions to Economic Analysis, in: Cathal O’Donoghue (ed.), Handbook of Microsimulation Modelling, volume 127, pages 167-221, Emerald Publishing Ltd.
    2. Mauro Mastrogiacomo & Nicole M. Bosch & Miriam D. A. C. Gielen & Egbert L. W. Jongen, 2017. "Heterogeneity in Labour Supply Responses: Evidence from a Major Tax Reform," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(5), pages 769-796, October.
    3. Colombino, Ugo & Islam, Nizamul, 2020. "Combining microsimulation and optimization to identify optimal flexible tax-transfer rules," EUROMOD Working Papers EM13/20, EUROMOD at the Institute for Social and Economic Research.
    4. Coda Moscarola, Flavia & Colombino, Ugo & Figari, Francesco & Locatelli, Marilena, 2020. "Shifting taxes away from labour enhances equity and fiscal efficiency," Journal of Policy Modeling, Elsevier, vol. 42(2), pages 367-384.
    5. NARAZANI Edlira & COLOMBINO Ugo, 2021. "Modelling sector-specific employment shocks with EUROLAB, a multidimensional behavioural model," JRC Working Papers on Taxation & Structural Reforms 2021-09, Joint Research Centre (Seville site).
    6. Ugo Colombino & Nizamul Islam, 2021. "Global and digitalised economy, new labour demand scenarios and optimal tax-transfer reforms," CHILD Working Papers Series 90 JEL Classification: H2, Centre for Household, Income, Labour and Demographic Economics (CHILD) - CCA.
    7. Ugo Colombino, 2015. "Five Crossroads on the Way to Basic Income. An Italian Tour," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 1(3), pages 353-389, November.
    8. Ugo Colombino & Nizamul Islam, 2021. "Combining microsimulation and optimization to identify optimal universalistic tax-transfer rule," LISER Working Paper Series 2021-06, LISER.
    9. Islam, Nizamul & Colombino, Ugo, 2018. "The case for NIT+FT in Europe. An empirical optimal taxation exercise," Economic Modelling, Elsevier, vol. 75(C), pages 38-69.
    10. Colombino, Ugo & Narazani, Edlira, 2014. "Closing the Gender Gap: Gender Based Taxation, Wage Subsidies or Basic Income?," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201412, University of Turin.
    11. Colombino, Ugo & Islam, Nizamul, 2020. "Optimal Tax-Transfer Rules under Equilibrium and New Labour Demand Scenarios," IZA Discussion Papers 13541, Institute of Labor Economics (IZA).
    12. Rolf Aaberge & Ugo Colombino, 2018. "Structural Labour Supply Models and Microsimulation," International Journal of Microsimulation, International Microsimulation Association, vol. 11(1), pages 162-197.
    13. Ugo Colombino, 2015. "The Istat Microsimulation Models," Rivista di statistica ufficiale, ISTAT - Italian National Institute of Statistics - (Rome, ITALY), vol. 17(2), pages 5-15.
    14. Nizamul Islam & Ugo Colombino, 2018. "The case for negative income tax with flat tax in Europe. An empirical optimal taxation exercise," Working Papers 454, ECINEQ, Society for the Study of Economic Inequality.
    15. Figari, Francesco & Paulus, Alari & Sutherland, Holly, 2014. "Microsimulation and policy analysis," ISER Working Paper Series 2014-23, Institute for Social and Economic Research.

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    More about this item

    Keywords

    Random Utility; Discrete Choice; Labour Supply; Policy Simulation; Alternative-Specific Constants; Equilibrium Simulation;
    All these keywords.

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • 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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