The labor-supply elasticity and borrowing constraints: Why estimates are biased

David Domeij () and Martin Floden ()

No 480, Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: The labor-supply elasticity is a central element in many macroeconomic models. We argue that assumptions underlying previous econometric estimates of the intertemporal labor supply elasticity are inconsistent with incomplete markets economies. In particular, if the econometrician ignores borrowing constraints, the elasticity will be biased downwards. Within our model, the bias may be up to 50 percent. We find a similar bias in PSID data.

Keywords: labor supply elasticity; intertemporal substitution; liquidity constraints (search for similar items in EconPapers)
JEL-codes: C20 C50 E20 J22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-lab and nep-ltv
Date: 2001-11-29
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Published in Review of Economic Dynamics, 2006, pages 242-262.

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Related works:
Journal Article: The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased (2006)
Software Item: Matlab code for The Labor-Supply Elasticity and Borrowing Constraints: Why Estimates are Biased
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