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On the role of unobserved preference heterogeneity in discrete choice models of labour supply

Daniele Pacifico ()

Center for the Analysis of Public Policies (CAPP) from Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi"

Abstract: The aim of this paper is to analyse the role of unobserved preference heterogeneity in structural discrete choice models of labour supply. Within this framework, unobserved heterogeneity has been estimated either parametrically or semiparametrically through random coefficient models. Nevertheless, the estimation of such models by means of standard, gradient-based methods is often difficult, in particular if the number of random parameters is high. For this reason, the role of unobserved taste variability in empirical studies is often constrained since only a small set of coefficients is assumed to be random. However, this simplification may affect the estimated labour supply elasticities and the subsequent policy recommendations. In this paper, we propose a new estimation method based on an EM algorithm that allows us to fully consider the effect of unobserved heterogeneity nonparametrically. Results show that labour supply elasticities and other post-estimation results change significantly only when unobserved heterogeneity is considered in a more flexible and comprehensive manner. Moreover, we analyse the behavioural effects of the introduction of a working-tax credit scheme in the Italian tax-benefit system and show that the magnitude of labour supply reactions and the post-reform income distribution can differ significantly depending on the specification of unobserved heterogeneity.

Keywords: behavioural microsimulation; labour supply; unobserved heterogeneity; random coefficient mixed models; EM algorithm (search for similar items in EconPapers)
JEL-codes: J22 H31 H24 C25 C14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dcm and nep-ecm
Date: 2010-05
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Journal Article: On the role of unobserved preference heterogeneity in discrete choice models of labour supply (2013) Downloads
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