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The Marginal Rate of Substitution and the Specification of Labour Supply Models

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In this note I revisit Heckman's proposal, [Heckman, 1974], to specify a static labour supply model using a simple formulation for the Marginal Rate of Substitution between total expenditure on consumption and hours of work. I describe the analytical form of the expenditure function and I show how the direct and indirect utility functions can be recovered. I propose an alternative specification for the MRS and in this case I describe analytically the labour supply functions, the indirect and direct utility functions as well as the expenditure function.

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  • Lanot, Gauthier, 2016. "The Marginal Rate of Substitution and the Specification of Labour Supply Models," Umeå Economic Studies 922, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:0922
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    1. Soest, Arthur van & Kapteyn, Arie & Kooreman, Peter, 1993. "Coherency and regularity of demand systems with equality and inequality constraints," Journal of Econometrics, Elsevier, vol. 57(1-3), pages 161-188.
    2. Bilancini, Ennio & Boncinelli, Leonardo, 2010. "Preferences and normal goods: An easy-to-check necessary and sufficient condition," Economics Letters, Elsevier, vol. 108(1), pages 13-15, July.
    3. Hans G. Bloemen & Arie Kapteyn, 2008. "The estimation of utility-consistent labor supply models by means of simulated scores," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(4), pages 395-422.
    4. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695, Elsevier.
    5. Blundell, Richard & MaCurdy, Thomas & Meghir, Costas, 2007. "Labor Supply Models: Unobserved Heterogeneity, Nonparticipation and Dynamics," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 69, Elsevier.
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    More about this item

    Keywords

    Labour Supply Model; Specification; Marginal Rate of Substitution;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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