A Structural Labor Supply Model with Nonparametric Preferences

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Abstract

Nonparametric techniques are usually seen as a statistic device for data description and exploration, and not as a tool for estimating models with a richer economic structure, which are often required for policy analysis.This paper presents an example where nonparametric flexibility can be attained in a fully structural model.A structural labour supply model with a nonparametric specification of preferences is introduced, which can be used for the analysis of all sorts of (non-linear) tax and benefits changes.Moreover, the model can deal with several other problems in estimation of structural labour supply models, such as non-convex tax rules, benefits, unobserved wages of non-workers, and model coherency.The utility maximization problem is solved by discretizing the budget set and choosing the optimal leisure and income combination from a finite set of alternatives.The direct utility function is approximated with a series expansion.For a given length of the expansion, the model is estimated by smooth simulated maximum likelihood.The wage equation is estimated jointly with the labour supply model, and measurement errors in wage rates are allowed for. The model is estimated with Dutch data on labour supply of married females, for various lengths of the series expansion.Estimates of labour supply elasticities and effects of a proposed tax reform suggest that the results do not change much once the order of the series expansion is extended beyond two, even though the second order model is statistically rejected against higher order models.Monte Carlo simulations are used to show that the estimation strategy has remarkably good finite sample properties for the size of our sample.On the other hand they lead to some concern about the potential bias to measurement error in the hours variable.
Original languageEnglish
Place of PublicationTilburg
PublisherEconometrics
Number of pages38
Volume2000-60
Publication statusPublished - 2000

Publication series

NameCentER Discussion Paper
Volume2000-60

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Labor supply
Tax
Measurement error
Leisure
Economic structure
Wage equation
Statistics
Wages
Structural model
Monte Carlo simulation
Finite sample properties
Wage rate
Utility function
Income
Simulated maximum likelihood
Policy analysis
Utility maximization
Labor supply elasticity
Tax reform

Cite this

van Soest, A. H. O., Das, J. W. M., & Gong, X. (2000). A Structural Labor Supply Model with Nonparametric Preferences. (CentER Discussion Paper; Vol. 2000-60). Tilburg: Econometrics.
van Soest, A.H.O. ; Das, J.W.M. ; Gong, X. / A Structural Labor Supply Model with Nonparametric Preferences. Tilburg : Econometrics, 2000. (CentER Discussion Paper).
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van Soest, AHO, Das, JWM & Gong, X 2000 'A Structural Labor Supply Model with Nonparametric Preferences' CentER Discussion Paper, vol. 2000-60, Econometrics, Tilburg.

A Structural Labor Supply Model with Nonparametric Preferences. / van Soest, A.H.O.; Das, J.W.M.; Gong, X.

Tilburg : Econometrics, 2000. (CentER Discussion Paper; Vol. 2000-60).

Research output: Working paperDiscussion paperOther research output

TY - UNPB

T1 - A Structural Labor Supply Model with Nonparametric Preferences

AU - van Soest, A.H.O.

AU - Das, J.W.M.

AU - Gong, X.

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N2 - Nonparametric techniques are usually seen as a statistic device for data description and exploration, and not as a tool for estimating models with a richer economic structure, which are often required for policy analysis.This paper presents an example where nonparametric flexibility can be attained in a fully structural model.A structural labour supply model with a nonparametric specification of preferences is introduced, which can be used for the analysis of all sorts of (non-linear) tax and benefits changes.Moreover, the model can deal with several other problems in estimation of structural labour supply models, such as non-convex tax rules, benefits, unobserved wages of non-workers, and model coherency.The utility maximization problem is solved by discretizing the budget set and choosing the optimal leisure and income combination from a finite set of alternatives.The direct utility function is approximated with a series expansion.For a given length of the expansion, the model is estimated by smooth simulated maximum likelihood.The wage equation is estimated jointly with the labour supply model, and measurement errors in wage rates are allowed for. The model is estimated with Dutch data on labour supply of married females, for various lengths of the series expansion.Estimates of labour supply elasticities and effects of a proposed tax reform suggest that the results do not change much once the order of the series expansion is extended beyond two, even though the second order model is statistically rejected against higher order models.Monte Carlo simulations are used to show that the estimation strategy has remarkably good finite sample properties for the size of our sample.On the other hand they lead to some concern about the potential bias to measurement error in the hours variable.

AB - Nonparametric techniques are usually seen as a statistic device for data description and exploration, and not as a tool for estimating models with a richer economic structure, which are often required for policy analysis.This paper presents an example where nonparametric flexibility can be attained in a fully structural model.A structural labour supply model with a nonparametric specification of preferences is introduced, which can be used for the analysis of all sorts of (non-linear) tax and benefits changes.Moreover, the model can deal with several other problems in estimation of structural labour supply models, such as non-convex tax rules, benefits, unobserved wages of non-workers, and model coherency.The utility maximization problem is solved by discretizing the budget set and choosing the optimal leisure and income combination from a finite set of alternatives.The direct utility function is approximated with a series expansion.For a given length of the expansion, the model is estimated by smooth simulated maximum likelihood.The wage equation is estimated jointly with the labour supply model, and measurement errors in wage rates are allowed for. The model is estimated with Dutch data on labour supply of married females, for various lengths of the series expansion.Estimates of labour supply elasticities and effects of a proposed tax reform suggest that the results do not change much once the order of the series expansion is extended beyond two, even though the second order model is statistically rejected against higher order models.Monte Carlo simulations are used to show that the estimation strategy has remarkably good finite sample properties for the size of our sample.On the other hand they lead to some concern about the potential bias to measurement error in the hours variable.

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van Soest AHO, Das JWM, Gong X. A Structural Labor Supply Model with Nonparametric Preferences. Tilburg: Econometrics. 2000. (CentER Discussion Paper).