Evaluating Alternative Representations of the Choice Sets in Models of Labour Supply

26 Pages Posted: 2 Mar 2006

See all articles by Rolf Aaberge

Rolf Aaberge

Statistics Norway; Institute for the Study of Labor (IZA); Deaprtment of Economics

Ugo Colombino

University of Turin - Department of Economics

Tom Wennemo

Statistics Norway

Multiple version iconThere are 2 versions of this paper

Date Written: February 2006

Abstract

During the last two decades, the discrete-choice modelling of labour supply decisions has become increasingly popular, starting with Aaberge et al. (1995) and van Soest (1995). Within the literature adopting this approach there are however two potentially important issues that are worthwhile analyzing in their implications and that so far have not been given the attention they might deserve. A first issue concerns the procedure by which the discrete alternatives are selected to enter the choice set. For example van Soest (1995) chooses (non probabilistically) a set of fixed points identical for every individual. This is by far the most widely adopted method. By contrast, Aaberge et al. (1995) adopt a sampling procedure suggested by McFadden (1978) and also assume that the choice set may differ across the households. A second issue concerns the availability of the alternatives. Most authors assume all the values of hours-of-work within some range [0, H] are equally available. At the other extreme, some authors assume only two or three alternatives (e.g. non-participation, part-time and full-time) are available for everyone. Aaberge et al. (1995) assume instead that not all the hour opportunities are equally available to everyone; they specify a probability density function of opportunities for each individual and the discrete choice set used in the estimation is built by sampling from that individual-specific density function. In this paper we explore by simulation the implications of

- the procedure used to build the choice set (fixed alternatives vs sampled alternatives)

- accounting or not accounting for a different availability of alternatives.

The way the choice set is represented seems to have little impact on the fitting of observed values, but a more significant and important impact on the out-of-sample prediction performance.

Keywords: labour supply, discrete-choice models, quantity constraints, prediction performance

JEL Classification: C51, C52, H31, J22

Suggested Citation

Aaberge, Rolf and Colombino, Ugo and Wennemo, Tom, Evaluating Alternative Representations of the Choice Sets in Models of Labour Supply (February 2006). IZA Discussion Paper No. 1986, Available at SSRN: https://ssrn.com/abstract=887761

Rolf Aaberge (Contact Author)

Statistics Norway ( email )

N-0033 Oslo
Norway

Institute for the Study of Labor (IZA) ( email )

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

Deaprtment of Economics ( email )

Norway

Ugo Colombino

University of Turin - Department of Economics ( email )

Via Po, 53
Torino, 10124
Italy

Tom Wennemo

Statistics Norway ( email )

N-0033 Oslo
Norway

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