Empirical Welfare Analysis in Random Utility Models of Labour Supply

Katholieke Universiteit Leuven Department of Economics Discussion Paper No. 10.30

36 Pages Posted: 20 Nov 2010

See all articles by André Decoster

André Decoster

Department of Economics KU Leuven

Peter Haan

DIW Berlin, German Institute for Economic Research; IZA Institute of Labor Economics

Multiple version iconThere are 4 versions of this paper

Date Written: November 1, 2010

Abstract

The aim of this paper is to apply recently proposed individual welfare measures in the context of random utility models of labour supply. Contrary to the standard practice of using reference preferences and wages, these measures preserve preference heterogeneity in the normative step of the analysis. They also make the ethical priors, implicit in any interpersonal comparison, more explicit.

On the basis of microdata from the Socio Economic Panel (SOEP) for married couples in Germany, we provide empirical evidence about the sensitivity of the welfare orderings to different normative principles embodied in these measures. We retrieve individual and household specific preference heterogeneity, by estimating a structural discrete choice labor supply model. We use this preference information to construct welfare orderings of households according to the different metrics, each embodying different ethical choices concerning the preference heterogeneity in the consumption-leisure space. We then discuss how sensitive the assessment of a hypothetical tax reform is to the choice of metric. The chosen tax reform is similar to a subsidy of social security contributions.

Keywords: Welfare Measures, Labour Supply, Random Utility, Preference Heterogeneity

JEL Classification: C35, D63, D78, H24, H31, J22

Suggested Citation

Decoster, André and Haan, Peter, Empirical Welfare Analysis in Random Utility Models of Labour Supply (November 1, 2010). Katholieke Universiteit Leuven Department of Economics Discussion Paper No. 10.30, Available at SSRN: https://ssrn.com/abstract=1711708 or http://dx.doi.org/10.2139/ssrn.1711708

André Decoster (Contact Author)

Department of Economics KU Leuven ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

HOME PAGE: http://www.andredecoster.be

Peter Haan

DIW Berlin, German Institute for Economic Research ( email )

Mohrenstraße 58
Berlin, 10117
Germany

IZA Institute of Labor Economics

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

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