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Exploring the Importance of Incentive Responses for Policy Projections

Justin van de Ven ()

International Journal of Microsimulation, 2017, vol. 10, issue 3, 134-164

Abstract: Behavioural responses to incentives is appealing functionality for any analytical tool designed to explore the implications of public policy alternatives. This study explores the interdependence between projected savings and labour supply decisions implied by a detailed and empirically validated microsimulation model of UK households. Analysis focusses upon sensitivity of projected effects of two generic policy counterfactuals, to three alternative approaches for projecting savings and employment decisions. The results reveal that a well-specified reduced-form can generate qualitatively similar projections for policy counterfactuals to a structural approach, even if quantitative differences are difficult to avoid. Furthermore, adapting a reducedform model to accommodate structural employment responses can be expected to obtain a close quantitative approximation to short-run projections in which both employment and savings decisions are based on utility maximisation theory. The same is not true, however, for longer-run projections due to the cumulative influence of state-specific variation.

Keywords: DYNAMIC MICROSIMULATION; POLICY EVALUATION; SAVINGS BEHAVIOUR; LABOUR SUPPLY; STRUCTURAL; REDUCED-FORM (search for similar items in EconPapers)
JEL-codes: C51 C61 C63 H31 (search for similar items in EconPapers)
Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:ijm:journl:v10:y:2017:i:3:p:134-164

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