Equilibrium Simulation with Microeconometric Models: A New Procedure with an Application to Income Support Policies
Ugo Colombino
No 6679, IZA Discussion Papers from Institute of Labor Economics (IZA)
Abstract:
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 interpreted 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 comparative 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.
Keywords: random utility; discrete choice; labour supply; policy simulation; alternative-specific constants; equilibrium simulation (search for similar items in EconPapers)
JEL-codes: C35 C53 H31 J22 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2012-06
New Economics Papers: this item is included in nep-cmp and nep-dcm
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Citations: View citations in EconPapers (5)
Published - substantially revised version published as 'A new equilibrium simulation procedure with discrete choice models' in: International Journal of Microsimulation, 2013, 6 (3), 25-49
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Working Paper: Equilibrium simulation with microeconometric models. A new procedure with an application to income support policies (2012)
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