Measuring Welfare Changes In Behavioural Micro Simulation Modeling: Accounting for the Random Utility Component

Journal of Applied Economics, Vol. 14, No. 1, pp. 5-34, May 2011

Posted: 15 Jun 2011 Last revised: 23 Jun 2011

See all articles by John Creedy

John Creedy

University of Melbourne - Department of Economics

Nicolas Herault

University of Melbourne - Melbourne Institute: Applied Economic & Social Research

Guyonne R.J. Kalb

University of Melbourne - Melbourne Institute: Applied Economic & Social Research; IZA; ARC Centre of Excellence for Children and Families over the Life Course

Date Written: May 1, 2011

Abstract

This paper presents a method of predicting individuals’ welfare changes (compensating and equivalent variations) arising from a tax or social security policy change in the context of behavioural microsimulation modelling, where individuals can choose between a limited number of discrete hours of work. The method allows fully for the nonlinearity of the budget constraint facing each individual, the probabilistic nature of the labour supply model and the presence of unobserved heterogeneity in the estimation of preference functions. Yet it is relatively straightforward to implement. An advantage of welfare measures, compared with changes in net incomes, is that they take into account the value of leisure and home production. The method is applied to a hypothetical income tax policy change in Australia.

Keywords: welfare change measures, equivalent variation, compensating variation, labour supply modeling, nonlinear budget constraint

JEL Classification: D63, H31, J22

Suggested Citation

Creedy, John and Herault, Nicolas and Kalb, Guyonne R.J., Measuring Welfare Changes In Behavioural Micro Simulation Modeling: Accounting for the Random Utility Component (May 1, 2011). Journal of Applied Economics, Vol. 14, No. 1, pp. 5-34, May 2011, Available at SSRN: https://ssrn.com/abstract=1864839

John Creedy

University of Melbourne - Department of Economics ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia
+61 800 666 300 (Phone)
+61 3 9347 3986 (Fax)

Nicolas Herault

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

HOME PAGE: http://www.findanexpert.unimelb.edu.au/researcher/person125238.html

Guyonne R.J. Kalb (Contact Author)

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

IZA ( email )

P.O. Box 7240
Bonn, D-53072
Germany

ARC Centre of Excellence for Children and Families over the Life Course ( email )

185 Pelham Street
Carlton, 3053
Australia

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
437
PlumX Metrics