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Compensated Discrete Choice with Particular Reference to Labor Supply

Author

Listed:
  • Dagsvik, John K.

    (Statsistics Norway and the Frisch Centre)

  • Strøm, Steinar

    (Dept. of Economics, University of Oslo)

  • Locatelli, Marilena

    (University of Turin and the Frisch Centre, Oslo)

Abstract
Recently Dagsvik and Karlström (2005) have demonstrated how one can compute Compensating Variation and Compensated Choice Probabilities by means of analytic formulas in the context of discrete choice models. In this paper we offer a new and simplified derivation of the Compensated probabilities in the case with independent random utility models. Subsequently, we discuss the application of this methodology to compute compensated labor supply responses (elasticisities) in discrete labor supply models. Whereas the Slutsky equation holds in the case of the standard microeconomic model with deterministic preferences, this is not so in the case of random utility models. Note that since the non-labor income elasticity is negative the Slutsky equation implies that the compensated wage elasticity is higher than the uncompensated one. With a random utility model we show empirically that in many cases the uncompensated wage elasticity is in fact the highest one.

Suggested Citation

  • Dagsvik, John K. & Strøm, Steinar & Locatelli, Marilena, 2013. "Compensated Discrete Choice with Particular Reference to Labor Supply," Memorandum 20/2013, Oslo University, Department of Economics.
    • Handle: RePEc:hhs:osloec:2013_020
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    References listed on IDEAS

    as
    1. Tom Kornstad & Thor O. Thoresen, 2006. "Effects of family policy reforms in Norway: results from a joint labour supply and childcare choice microsimulation analysis," Fiscal Studies, Institute for Fiscal Studies, vol. 27(3), pages 339-371, August.
    2. Steinar StrØm & John K. Dagsvik, 2006. "Sectoral labour supply, choice restrictions and functional form," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(6), pages 803-826.
    3. John Creedy & Guyonne Kalb, 2005. "Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation," Journal of Economic Surveys, Wiley Blackwell, vol. 19(5), pages 697-734, December.
    4. John K. Dagsvik & Anders Karlström, 2005. "Compensating Variation and Hicksian Choice Probabilities in Random Utility Models that are Nonlinear in Income," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(1), pages 57-76.
    5. John K. Dagsvik & Zhiyang Jia & Tom Kornstad & Thor O. Thoresen, 2014. "Theoretical And Practical Arguments For Modeling Labor Supply As A Choice Among Latent Jobs," Journal of Economic Surveys, Wiley Blackwell, vol. 28(1), pages 134-151, February.
    6. Richard E. Quandt, 1956. "A Probabilistic Theory of Consumer Behavior," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 70(4), pages 507-536.
    7. John K. Dagsvik & Zhiyang Jia, 2006. "Labor Supply as a Choice among Latent Job Opportunities. A Practical Empirical Approach," Discussion Papers 481, Statistics Norway, Research Department.
    8. repec:bla:scandj:v:97:y:1995:i:4:p:635-59 is not listed on IDEAS
    9. Aaberge, Rolf & Colombino, Ugo & Strom, Steinar, 1999. "Labour Supply in Italy: An Empirical Analysis of Joint Household Decisions, with Taxes and Quantity Constraints," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(4), pages 403-422, July-Aug..
    10. Dagsvik, John K, 1994. "Discrete and Continuous Choice, Max-Stable Processes, and Independence from Irrelevant Attributes," Econometrica, Econometric Society, vol. 62(5), pages 1179-1205, September.
    11. Arthur van Soest, 1995. "Structural Models of Family Labor Supply: A Discrete Choice Approach," Journal of Human Resources, University of Wisconsin Press, vol. 30(1), pages 63-88.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Female labor supply; compensated wage elasticities in RUM;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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