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Stochastic Problems in the Simulation of Labor Supply

In: Behavioral Simulation Methods in Tax Policy Analysis

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  • Jerry A. Hausman

Abstract

Modern work in labor supply attempts to account for nonlinear budget sets created by government tax and transfer programs. Progressive taxation leads to nonlinear convex budget sets while the earned income credit, social security contributions, AFDC, and the proposed NIT plans all lead to nonlinear, nonconvex budget sets. Where nonlinear budget sets occur, the expected value of the random variable, labor supply, can no longer be calculated by simply 'plugging in' the estimated coefficients. Properties of the stochastic terms which arise from the residual or from a stochastic preference structure need to be accounted for. This paper considers both analytical approaches and Monte Carlo approaches to the problem. We attempt to find accurate and low cost computational techniques which would permit extensive use of simulation methodology. Large samples are typically included in such simulations which makes computational techniques an important consideration. But these large samples may also lead to simplifications in computational techniques because of the averaging process used in calculation of simulation results. This paper investigates the tradeoffs available between computational accuracy and cost in simulation exercises over large samples.
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Suggested Citation

  • Jerry A. Hausman, 1983. "Stochastic Problems in the Simulation of Labor Supply," NBER Chapters,in: Behavioral Simulation Methods in Tax Policy Analysis, pages 47-82 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:7705
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    References listed on IDEAS

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    1. Hausman, Jerry A., 1979. "The econometrics of labor supply on convex budget sets," Economics Letters, Elsevier, vol. 3(2), pages 171-174.
    2. Burtless, Gary & Hausman, Jerry A, 1978. "The Effect of Taxation on Labor Supply: Evaluating the Gary Negative Income Tax Experiments," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1103-1130, December.
    3. Atkinson, A. B. & Stiglitz, J. E., 1976. "The design of tax structure: Direct versus indirect taxation," Journal of Public Economics, Elsevier, vol. 6(1-2), pages 55-75.
    4. Rosen, Harvey S, 1976. "Taxes in a Labor Supply Model with Joint Wage-Hours Determination," Econometrica, Econometric Society, vol. 44(3), pages 485-507, May.
    5. Diamond, P. A. & McFadden, D. L., 1974. "Some uses of the expenditure function in public finance," Journal of Public Economics, Elsevier, vol. 3(1), pages 3-21, February.
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    1. repec:eee:labchp:v:1:y:1986:i:c:p:3-102 is not listed on IDEAS
    2. Bruno Théret & Didier Uri, 1988. "La courbe de Laffer dix ans après : un essai de bilan critique," Revue Économique, Programme National Persée, vol. 39(4), pages 753-808.
    3. Gan, Li & Ju, Gaosheng & Zhu, Xi, 2015. "Nonparametric estimation of structural labor supply and exact welfare change under nonconvex piecewise-linear budget sets," Journal of Econometrics, Elsevier, vol. 188(2), pages 526-544.
    4. Peter C. Reiss & Matthew W. White, 2006. "Evaluating Welfare with Nonlinear Prices," NBER Working Papers 12370, National Bureau of Economic Research, Inc.
    5. Sielaff, Christian, 2011. "Steuerkomplexität und Arbeitsangebot: Eine experimentelle Analyse," Discussion Papers 2011/13, Free University Berlin, School of Business & Economics.
    6. Olmstead, Sheila M. & Michael Hanemann, W. & Stavins, Robert N., 2007. "Water demand under alternative price structures," Journal of Environmental Economics and Management, Elsevier, vol. 54(2), pages 181-198, September.
    7. Seko, Miki, 2002. "Nonlinear budget constraints and estimation: effects of subsidized home loans on floor space decisions in Japan," Journal of Housing Economics, Elsevier, vol. 11(3), pages 280-299, September.
    8. Grodner, Andrew & Kniesner, Thomas J. & Bishop, John A., 2011. "Social Interactions in the Labor Market," Foundations and Trends(R) in Microeconomics, now publishers, vol. 6(4), pages 265-366, September.
    9. Hayo, Bernd & Uhl, Matthias, 2015. "Taxation and labour supply: Evidence from a representative population survey," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 336-346.
    10. BARGAIN Olivier & DOORLEY Karina, 2016. "The Effect of Social Benefits on Youth Employment: Combining RD and a Behavioral Model," LISER Working Paper Series 2016-12, LISER.
    11. repec:eee:labchp:v:1:y:1986:i:c:p:103-204 is not listed on IDEAS
    12. Marco Bianchi & Bjorn R. Gudmundsson & Gylfi Zoega, 2001. "Iceland's Natural Experiment in Supply-Side Economics," American Economic Review, American Economic Association, vol. 91(5), pages 1564-1579, December.
    13. Fullerton, Don & Gan, Li, 2004. "A simulation-based welfare loss calculation for labor taxes with piecewise-linear budgets," Journal of Public Economics, Elsevier, vol. 88(11), pages 2339-2359, September.

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