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Apractical framework for behavioral microsimulation using external evidence

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Abstract

Whenstructural labor supply models are unavailable or impractical, the paper proposes a practical method for incorporating behavioral responses into static taxbenefit microsimulation models. Using elasticity estimates from the literature, the proposed external evidence procedure offers a flexible and transparent tool for incor porating behavioral effects into microsimulation. We distinguish between responses in income both at the in tensive and extensive margins. The framework is implemented within the Norwegian LOTTE microsimulation system and illustrated through two policy reforms: (i) a five percentage-point increase in the two top brackets of the labor income tax and (ii) the introduction of a work-related income deduction. Empirical results show that behavioral adjustments substantially offset mechanical revenue effects for high-income tax increases, while the work deduction generates positive participation responses but amplifies revenue losses due to phase-out ef fects.

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  • Zhiyang Jia & Snorre Skagseth & Thor O. Thoresen & Trine E. Vattø, 2026. "Apractical framework for behavioral microsimulation using external evidence," Discussion Papers 1034, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:1034
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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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