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On the role of unobserved preference heterogeneity in discrete choice models of labour supply

  • Daniele Pacifico

    ()

The aim of this paper is to analyse the role of unobserved preference heterogeneity in structural discrete choice models of labour supply. Within this framework, unobserved heterogeneity has been estimated either parametrically or semiparametrically through random coefficient models. Nevertheless, the estimation of such models by means of standard, gradient-based methods is often difficult, in particular if the number of random parameters is high. For this reason, the role of unobserved taste variability in empirical studies is often constrained since only a small set of coefficients is assumed to be random. However, this simplification may affect the estimated labour supply elasticities and the subsequent policy recommendations. In this paper, we propose a new estimation method based on an EM algorithm that allows us to fully consider the effect of unobserved heterogeneity nonparametrically. Results show that labour supply elasticities and other post-estimation results change significantly only when unobserved heterogeneity is considered in a more flexible and comprehensive manner. Moreover, we analyse the behavioural effects of the introduction of a working-tax credit scheme in the Italian tax-benefit system and show that the magnitude of labour supply reactions and the post-reform income distribution can differ significantly depending on the specification of unobserved heterogeneity.

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Paper provided by Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi" in its series Center for the Analysis of Public Policies (CAPP) with number 0071.

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Date of creation: May 2010
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Handle: RePEc:mod:cappmo:0071
Contact details of provider: Web page: http://www.capp.unimore.it

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  1. Heckman, James J, 1974. "Shadow Prices, Market Wages, and Labor Supply," Econometrica, Econometric Society, vol. 42(4), pages 679-94, July.
  2. van Soest, Arthur & Das, Marcel & Gong, Xiaodong, 2002. "A structural labour supply model with flexible preferences," Journal of Econometrics, Elsevier, vol. 107(1-2), pages 345-374, March.
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  4. John Creedy & Guyonne Kalb & Rosanna Scutella, 2003. "Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation," Melbourne Institute Working Paper Series wp2003n21, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  5. Greene, William H. & Hensher, David A., 2003. "A latent class model for discrete choice analysis: contrasts with mixed logit," Transportation Research Part B: Methodological, Elsevier, vol. 37(8), pages 681-698, September.
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  7. Frederic Vermeulen, 2002. "A collective model for female labour supply with nonparticipation and taxation," Public Economics Working Paper Series ces0214, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, Working Group Public Economics.
  8. Olivier Bargain, 2007. "On Modeling Household Labor Supply With Taxation," Working Papers 200711, School of Economics, University College Dublin.
  9. Massimo Baldini & Daniele Pacifico, 2009. "The recent reforms of the Italian personal income tax: distributive and efficiency effects," Center for the Analysis of Public Policies (CAPP) 0066, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
  10. Anders Skrondal & Sophia Rabe-Hesketh, 2009. "Prediction in multilevel generalized linear models," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 172(3), pages 659-687.
  11. Daniele Pacifico, 2011. "Estimating nonparametric mixed Logit Models via EM algorithm," Department of Economics 0663, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
  12. M. Keane & R. Mofitt, 1995. "A Structural Model of Multiple Welfare Program Participation and Labor Supply," Working Papers 95-4, Brown University, Department of Economics.
  13. Peter Haan & Katharina Wrohlich, 2007. "Optimal Taxation: The Design of Child Related Cash- and In-Kind-Benefits," SOEPpapers on Multidisciplinary Panel Data Research 65, DIW Berlin, The German Socio-Economic Panel (SOEP).
  14. Brewer, Mike & Duncan, Alan & Shephard, Andrew & Suarez, Maria Jose, 2006. "Did working families' tax credit work? The impact of in-work support on labour supply in Great Britain," Labour Economics, Elsevier, vol. 13(6), pages 699-720, December.
  15. Peter Haan, 2006. "Much ado about nothing: conditional logit vs. random coefficient models for estimating labour supply elasticities," Applied Economics Letters, Taylor & Francis Journals, vol. 13(4), pages 251-256.
  16. Heckman, James & Singer, Burton, 1984. "A Method for Minimizing the Impact of Distributional Assumptions in Econometric Models for Duration Data," Econometrica, Econometric Society, vol. 52(2), pages 271-320, March.
  17. Junyi Shen, 2009. "Latent class model or mixed logit model? A comparison by transport mode choice data," Applied Economics, Taylor & Francis Journals, vol. 41(22), pages 2915-2924.
  18. Frederic Vermeulen & Olivier Bargain & Miriam Beblo & Denis Beninger & Richard Blundell & Raquel Carrasco & Maria-Concetta Chiuri & François Laisney & Valérie Lechene & Nicolas Moreau & Michal Myck & , 2006. "Collective Models of Labor Supply with Nonconvex Budget Sets and Nonparticipation: A Calibration Approach," Review of Economics of the Household, Springer, vol. 4(2), pages 113-127, 06.
  19. Denise Doiron & Guyonne Kalb, 2005. "Demands for Child Care and Household Labour Supply in Australia," The Economic Record, The Economic Society of Australia, vol. 81(254), pages 215-236, 09.
  20. Daniel McFadden & Kenneth Train, 2000. "Mixed MNL models for discrete response," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 15(5), pages 447-470.
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