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On modeling household labor supply with taxation

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  • Olivier Bargain

Abstract

Discrete-choice models provide a tractable method and a simple way to represent utility-maximizing labor supply decisions in the presence of highly nonlinear and possibly non-convex budget constraints. Thus, it is not surprising that they are so extensively used for ex-ante evaluation of tax-benefit reforms (see Van Soest, 1995, Hoynes, 1996, or Blundell et al., 2000, among others). The question asked in this paper is whether it is possible and desirable to get still more flexibility by relaxing some of the usual constraints imposed on household preferences and rationality. By embedding the traditional structural approach in a more general specification, it is first shown that the restrictions on underlying well-behaved leisure-consumption preferences are rejected. It is often the case that structural models gain some flexibility through additional refinements (e.g. costs of work) whose ad hoc interpretation seems unnecessary. We argue instead for the use of a fully flexible model which remains agnostic on the role of the covariates. More fundamentally still, the standard approach - the assumption of unitary households optimizing statically - is strongly rejected when tested against a general model with price- and income- dependent preferences. In a static environment, this result is a strong rejection of the unitary approach. Restrictions from structural and standard models also imply important discrepancies in the simulated predictions of behavioral responses to a tax reform. This results encourage further effort toward more general approaches including dynamic and collective models.

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  • Olivier Bargain, 2004. "On modeling household labor supply with taxation," DELTA Working Papers 2004-14, DELTA (Ecole normale supérieure).
  • Handle: RePEc:del:abcdef:2004-14
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    Cited by:

    1. François Bourguignon & Amedeo Spadaro, 2006. "Microsimulation as a tool for evaluating redistribution policies," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 4(1), pages 77-106, April.
    2. François Bourguignon & Amedeo Spadaro, 2012. "Tax–benefit revealed social preferences," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 10(1), pages 75-108, March.
    3. Xisco Oliver & Luca Piccoli & Amedeo Spadaro, 2010. "A Microsimulation Evaluation Of Efficiency, Inequality, And Polarization Effects Of Implementing The Danish, The French, And The U.K. Redistribution System In Spain," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 56(1), pages 186-214, March.
    4. Daniele Pacifico, 2013. "On the role of unobserved preference heterogeneity in discrete choice models of labour supply," Empirical Economics, Springer, vol. 45(2), pages 929-963, October.
    5. Bargain, Olivier & Orsini, Kristian, 2006. "In-work policies in Europe: Killing two birds with one stone?," Labour Economics, Elsevier, vol. 13(6), pages 667-697, December.
    6. Arntz, Melanie & Boeters, Stefan & Gürtzgen, Nicole & Schubert, Stefanie, 2008. "Analysing welfare reform in a microsimulation-AGE model: The value of disaggregation," Economic Modelling, Elsevier, vol. 25(3), pages 422-439, May.
    7. Pacifico, Daniele, 2009. "Modelling Unobserved Heterogeneity in Discrete Choice Models of Labour Supply," MPRA Paper 19030, University Library of Munich, Germany.
    8. repec:hpe:journl:y:2017:v:222:i:3:p:9-41 is not listed on IDEAS
    9. Daniele Pacifico, 2014. "On the role of unobserved preference Heterogeneity in discrete choice Models of labour supply," Working Papers 6, Department of the Treasury, Ministry of the Economy and of Finance.
    10. Melanie Arntz & Stefan Boeters & Nicole Gürtzgen & Stefanie Schubert, 2006. "Analysing Welfare Reform in a Microsimulation-AGE Model," Computing in Economics and Finance 2006 109, Society for Computational Economics.

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    JEL classification:

    • C25 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions; Probabilities
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • 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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