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Exploring the Importance of Incentive Responses for Policy Projections

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  • Justin van de Ven

    (National Institute of Economic and Social Research, London, UK. Melbourne Institute of Applied Economic and Social Research, University of Melbourne, Australia.)

Abstract

Behavioural responses to incentives is appealing functionality for any analytical tool designed to explore the implications of public policy alternatives. This study explores the interdependence between projected savings and labour supply decisions implied by a detailed and empirically validated microsimulation model of UK households. Analysis focusses upon sensitivity of projected effects of two generic policy counterfactuals, to three alternative approaches for projecting savings and employment decisions. The results reveal that a well-specified reduced-form can generate qualitatively similar projections for policy counterfactuals to a structural approach, even if quantitative differences are difficult to avoid. Furthermore, adapting a reducedform model to accommodate structural employment responses can be expected to obtain a close quantitative approximation to short-run projections in which both employment and savings decisions are based on utility maximisation theory. The same is not true, however, for longer-run projections due to the cumulative influence of state-specific variation.

Suggested Citation

  • Justin van de Ven, 2017. "Exploring the Importance of Incentive Responses for Policy Projections," International Journal of Microsimulation, International Microsimulation Association, vol. 10(3), pages 134-164.
    • Handle: RePEc:ijm:journl:v10:y:2017:i:3:p:134-164
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    References listed on IDEAS

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    5. Justin van de Ven, 2017. "Exploring the Importance of Incentive Responses for Policy Projections; APPENDIX," International Journal of Microsimulation, International Microsimulation Association, vol. 10(3), pages 165-183.
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    Cited by:

    1. Cathal O'Donoghue & Gijs Dekkers, 2018. "Increasing the Impact of Dynamic Microsimulation Modelling," International Journal of Microsimulation, International Microsimulation Association, vol. 11(1), pages 61-96.

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    More about this item

    Keywords

    DYNAMIC MICROSIMULATION; POLICY EVALUATION; SAVINGS BEHAVIOUR; LABOUR SUPPLY; STRUCTURAL; REDUCED-FORM;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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