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Identification and Estimation of Labor Supply Elasticities from Kinked Budget Sets

Author

Listed:
  • Deniz Dutz
  • Morten Håvarstein
  • Magne Mogstad
  • Alexander Torgovitsky

Abstract

We study the identification of labor supply elasticities from kinked budget sets in a model with income effects and individual heterogeneity in the elasticities. We provide point and partial identification results for compensated elasticities, uncompensated elasticities, and income effects. We use administrative data to apply our results to the Norwegian tax system, which exhibits a kink for the self-employed. There is clear bunching around the kink point, suggesting that the self-employed respond to the change in incentives created by the kink. We find that the bounds are often tight even under weak assumptions. Our results show that uncompensated elasticities are close to zero and compensated elasticities are sufficiently small to conclude that the excess burden of taxation is low.

Suggested Citation

  • Deniz Dutz & Morten Håvarstein & Magne Mogstad & Alexander Torgovitsky, 2026. "Identification and Estimation of Labor Supply Elasticities from Kinked Budget Sets," NBER Working Papers 35047, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35047
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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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