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The labor-supply elasticity and borrowing constraints: Why estimates are biased

  • Domeij, David

    ()

    (Dept. of Economics, Stockholm School of Economics)

  • Floden, Martin

    ()

    (Dept. of Economics, Stockholm School of Economics)

The labor-supply elasticity is a central element in many macroeconomic models. We argue that assumptions underlying previous econometric estimates of the intertemporal labor supply elasticity are inconsistent with incomplete markets economies. In particular, if the econometrician ignores borrowing constraints, the elasticity will be biased downwards. Within our model, the bias may be up to 50 percent. We find a similar bias in PSID data.

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Paper provided by Stockholm School of Economics in its series SSE/EFI Working Paper Series in Economics and Finance with number 480.

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Length: 30 pages
Date of creation: 29 Nov 2001
Date of revision:
Publication status: Published in Review of Economic Dynamics, 2006, pages 242-262.
Handle: RePEc:hhs:hastef:0480
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