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On Modeling Household Labor Supply with Taxation

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  • Bargain, Olivier

    () (University of Bordeaux)

Abstract

Discrete-choice models provide a simple way of representing 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. 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. We first suggest a model which attains flexibility by making parameters vary freely across hours choices. By embedding the traditional structural approach in this specification, it is shown that the restrictions on underlying well-behaved leisure-consumption preferences are rejected. More fundamentally still, the standard approach, i.e., 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, the result boils down to a rejection of the unitary model. Interestingly, restrictions from both structural and standard models also imply important discrepancies in estimated elasticities and simulated predictions of responses to a tax reform. In particular, large differences appear between standard models and the general model which possibly encompasses several interpretations including dynamic aspects and intrahousehold negotiation. These findings illustrate the difficulty to conduct policy analysis in a way which reconciles the best explanatory power and a framework consistent with economic theory. The general model we suggest may provide future research with an interesting setting to test some of the dimensions of household behavior.

Suggested Citation

  • Bargain, Olivier, 2005. "On Modeling Household Labor Supply with Taxation," IZA Discussion Papers 1455, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp1455
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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. repec:hpe:journl:y:2017:v:222:i:3:p:9-41 is not listed on IDEAS
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. Pacifico, Daniele, 2009. "Modelling Unobserved Heterogeneity in Discrete Choice Models of Labour Supply," MPRA Paper 19030, University Library of Munich, Germany.

    More about this item

    Keywords

    multinomial logit; household labor supply; taxation; microsimulation; unitary model; collective model;

    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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