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Equilibrium simulation with microeconometric models. A new procedure with an application to income support policies

Many microeconometric models of discrete labour supply include alternative-specific constants meant to account for (possibly besides other factors) the density or accessibility of particular types of jobs (e.g. part-time jobs vs. full-time jobs). The most common use of these models is the simulation of tax-transfer reforms. The simulation is usually interpr eted as a comparative statics exercise, i.e. the comparison of different equilibria induced by different policy regimes. The simulation procedure, however, typically keeps fixed the estimated alternative-specific constants. In this note we argue that this procedure is not consistent with the comparati ve statics interpretation. Since the constants reflect the number of jobs and since the number of people willing to work changes as a response to the change in tax-transfer regime, the new equilibrium induced by the reform implies that the constants should also change. A structural interpretation of the alternative-specific constants leads to the development of a simulation procedure consistent with the comparative statics interpretation. The procedure is illustrated with a simulation of alternative reforms of the income support policies in Italy.

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Paper provided by University of Turin in its series Department of Economics and Statistics Cognetti de Martiis. Working Papers with number 201209.

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Length: 32 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:uto:dipeco:201209
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  1. Rolf Aaberge & Ugo Colombino, 2008. "Designing Optimal Taxes with a Microeconometric Model of Household Labour Supply," ICER Working Papers 19-2008, ICER - International Centre for Economic Research.
  2. John Creedy & Guyonne Kalb, 2005. "Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 697-734, December.
  3. Dagsvik, John K, 2000. "Aggregation in Matching Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 41(1), pages 27-57, February.
  4. John Creedy & Alan Duncan, 2001. "Aggregating labour supply and feedback effects in microsimulation," IFS Working Papers W01/24, Institute for Fiscal Studies.
  5. Massimo Baldini & Stefano Toso & Paolo Bosi, 2002. "Targeting welfare in Italy: old problems and perspectives on reform," Fiscal Studies, Institute for Fiscal Studies, vol. 23(1), pages 51-75, March.
  6. Aaberge, Rolf & Dagsvik, John K & Strom, Steinar, 1995. " Labor Supply Responses and Welfare Effects of Tax Reforms," Scandinavian Journal of Economics, Wiley Blackwell, vol. 97(4), pages 635-59, December.
  7. Rolf Aaberge, 2006. "Gini's Nuclear Family," Discussion Papers 491, Statistics Norway, Research Department.
  8. Ugo Colombino & Marilena Locatelli & Edlira Narazani & Cathal O’Donoghue, 2010. "Alternative Basic Income Mechanisms: An Evaluation Exercise with a Microeconometric Model," CHILD Working Papers wp04_10, CHILD - Centre for Household, Income, Labour and Demographic economics - ITALY.
  9. Aaberge, Rolf & Colombino, Ugo & Strom, Steinar, 1999. "Labour Supply in Italy: An Empirical Analysis of Joint Household Decisions, with Taxes and Quantity Constraints," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(4), pages 403-22, July-Aug..
  10. Aaberge, Rolf & Colombino, Ugo, 2009. "Accounting for Family Background when Designing Optimal Income Taxes: A Microeconometric Simulation Analysis," IZA Discussion Papers 4598, Institute for the Study of Labor (IZA).
  11. Steinar StrØm & John K. Dagsvik, 2006. "Sectoral labour supply, choice restrictions and functional form," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(6), pages 803-826.
  12. Aaberge, Rolf & Colombino, Ugo & Strøm, Steinar, 2003. "Do More Equal Slices Shrink the Cake? An Empirical Investigation of Tax-Transfer Reform Proposals in Italy," Memorandum 37/2003, Oslo University, Department of Economics.
  13. Dagsvik, John K, 1994. "Discrete and Continuous Choice, Max-Stable Processes, and Independence from Irrelevant Attributes," Econometrica, Econometric Society, vol. 62(5), pages 1179-1205, September.
  14. De Vincenti Claudio & Paladini Ruggero, 2009. "Personal Income Tax Design for Italy: Lessons from the Theory," Rivista italiana degli economisti, Società editrice il Mulino, issue 1, pages 7-46.
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