Bounds on Elasticities with Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply
65 Pages Posted: 18 Jan 2010 Last revised: 4 Mar 2023
Date Written: December 2009
Abstract
How can price elasticities be identified when agents face optimization frictions such as adjustment costs or inattention? I derive bounds on structural price elasticities that are a function of the observed effect of a price change on demand, the size of the price change, and the degree of frictions. The degree of frictions is measured by the utility losses agents tolerate to deviate from the frictionless optimum. The bounds imply that frictions affect intensive margin elasticities much more than extensive margin elasticities. I apply these bounds to the literature on labor supply. The utility costs of ignoring the tax changes used to identify intensive margin labor supply elasticities are typically less than 1% of earnings. As a result, small frictions can explain the differences between micro and macro elasticities, extensive and intensive margin elasticities, and other disparate findings. Pooling estimates from existing studies, I estimate a Hicksian labor supply elasticity of 0.33 on the intensive margin and 0.25 on the extensive margin after accounting for frictions.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Work and Leisure in the U.S. And Europe: Why so Different?
By Alberto F. Alesina, Edward L. Glaeser, ...
-
Work and Leisure in the U.S. And Europe: Why so Different?
By Alberto F. Alesina, Edward L. Glaeser, ...
-
Work and Leisure in the U.S. And Europe: Why so Different?
By Alberto F. Alesina, Edward L. Glaeser, ...
-
By Steven J. Davis and Magnus Henrekson
-
By Steven J. Davis and Magnus Henrekson
-
Structural Transformation and the Deterioration of European Labor Market Outcomes