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Labour supply and taxation with restricted choices

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  • Magali Beffy

    (CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - CNRS - Centre National de la Recherche Scientifique)

  • Richard Blundell

    (UCL - University College of London [London], IFS - Laboratory of the Institute for Fiscal Studies - Institute for Fiscal Studies)

  • Antoine Bozio

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, IFS - Laboratory of the Institute for Fiscal Studies - Institute for Fiscal Studies, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique)

  • Guy Laroque

    (UCL - University College of London [London], IFS - Laboratory of the Institute for Fiscal Studies - Institute for Fiscal Studies, ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

  • Maxime Tô

    (UCL - University College of London [London], IFS - Laboratory of the Institute for Fiscal Studies - Institute for Fiscal Studies)

Abstract

A model of labour supply and taxation is developed in which observed hours reflect both the distribution of preferences and restrictions on choices. Hours restrictions are placed in a constrained rational choice setting in which the set of alternative hours on offer is restricted. Choices are made on a random subset of possible hours. We focus on the case where the choice set contains at most two offers. We show that when the choice set distribution is known, preferences can be identified. Conversely we show that, where preferences are known, the choice set distribution can be fully recovered. Conditions for identification of both preferences and the distribution of choice sets are also developed. We illustrate this approach in a labour supply setting with nonlinear budget constraints. Heterogeneity in the budget constraint reveals properties of the choice set. This framework is used to study the labour supply behaviour of a large sample of working age mothers in the UK, accounting for nonlinearities in the tax and welfare benefit system, fixed costs of work and restrictions on hours choices.

Suggested Citation

  • Magali Beffy & Richard Blundell & Antoine Bozio & Guy Laroque & Maxime Tô, 2019. "Labour supply and taxation with restricted choices," SciencePo Working papers Main halshs-01883898, HAL.
    • Handle: RePEc:hal:spmain:halshs-01883898
    DOI: 10.1016/j.jeconom.2018.12.004
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-01883898
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    6. Schoefer, Benjamin & Mui, Preston, 2019. "Reservation Raises: The Aggregate Labor Supply Curve at the Extensive Margin," CEPR Discussion Papers 14209, C.E.P.R. Discussion Papers.
    7. Kosonen, Tuomas & Matikka, Tuomas, 2020. "Discrete Labor Supply: Empirical Evidence and Implications," Working Papers 132, VATT Institute for Economic Research.
    8. Key, Tomas & Lenney, Jamie, 2024. "The impact of aggregate fluctuations across the UK income distribution," Bank of England working papers 1083, Bank of England.
    9. Alpaslan Akay & Olivier Bargain & H. Xavier Jara, 2020. "‘Fair’ welfare comparisons with heterogeneous tastes: subjective versus revealed preferences," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 55(1), pages 51-84, June.
    10. Beckmannshagen, Mattis & Schröder, Carsten, 2022. "Earnings inequality and working hours mismatch," Labour Economics, Elsevier, vol. 76(C).
    11. Tomas Key & Jamie Lenney, 2024. "The Impact of Aggregate Fluctuations Across the UK Income Distribution," Discussion Papers 2430, Centre for Macroeconomics (CFM).
    12. Tuomas Kosonen & Tuomas Matikka, 2023. "Discrete Labor Supply: Quasi-Experimental Evidence and Implications," Working Papers 9, Finnish Centre of Excellence in Tax Systems Research.
    13. Dagsvik, John K. & Strøm, Steinar & Locatelli, Marilena, 2021. "Marginal compensated effects in discrete labor supply models," Journal of choice modelling, Elsevier, vol. 41(C).
    14. Fischer, Benjamin & Jessen, Robin & Steiner, Viktor, 2019. "Work incentives and the cost of redistribution via tax-transfer reforms under constrained labor supply," Discussion Papers 2019/10, Free University Berlin, School of Business & Economics.
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    16. Sören Blomquist, 2023. "Evaluating the Discrete Choice and BN Methods to Estimate Labor Supply Functions," CESifo Working Paper Series 10827, CESifo.
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    18. Blundell, R. & French, E. & Tetlow, G., 2016. "Retirement Incentives and Labor Supply," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 457-566, Elsevier.
    19. Kuan-Ming Chen & Ning Ding & John A. List & Magne Mogstad, 2020. "Reservation Wages and Workers’ Valuation of Job Flexibility: Evidence from a Natural Field Experiment," Working Papers 2020-124, Becker Friedman Institute for Research In Economics.
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