Back to the Future: Decomposition Analysis of Distributive Policies Using Behavioural Simulations

Olivier Bargain

No 5226, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: For policy makers and analysts, it is important to isolate the redistributive impact of tax-benefit policy changes from changes in the environment in which policies operate. When actual reforms are motivated by work incentives, it is also crucial to evaluate behavioural responses and the distributional consequences thereof. For that purpose, we embed counterfactual simulations in a formal framework based on the Shapley value decomposition and quantify the relative roles of (i) tax-benefit policy changes (direct policy effect), (ii) labour supply responses to the policy reforms (indirect effect) and (iii) all other factors affecting income distribution over time. An application to the UK shows that the redistributive reforms of the 1998-2001 period have offset the increase in inequality that would have occurred otherwise. They also contribute to a strong decline in child poverty and poverty amongst single parent households. In the latter group, a third of the headcount poverty reduction (and half of the reduction in the depth of poverty) is on account of the very large incentive effect of policy changes.

Keywords: Shapley value decomposition; tax-benefit policy; behavioural microsimulation; poverty; inequality; labour supply (search for similar items in EconPapers)
JEL-codes: H23 H53 I32 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2010-09
New Economics Papers: this item is included in nep-cmp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

Published - published in: International Tax and Public Finance, 2012, 19 (5), 708-731

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Working Paper: Back to the future - decomposition analysis of distributive policies using behavioural simulations (2010)
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