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Discreteness and the Welfare Cost of Labor Supply Tax Distortions

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  • Keshab Bhattarai
  • John Whalley

Abstract

We discuss the role played by discrete labor supply (leisure consumption) choice in" affecting measures of the welfare cost of labor supply tax distortions. We construct comparable" continuous and discrete choice models, each calibrated to have similar aggregate" (uncompensated) labor supply elasticities. In the former, there is a single representative" consumer; in the latter there is a distribution of individuals across preference parameters. In the" discrete model, taxes induce a large response from a subset of the population of the population shows unchanged behavior. Welfare costs of similar taxes in continuous" models can substantially exceed those in discrete models or vice versa formulation used. Experiments are also reported for a two labor type household model with one" continuous variable (secondary labor) and one discrete variable (primary labor) are also made using an empirically based model specification calibrated to UK data. Model" results clearly show that discrete choice matters in the assessment of the cost of labor supply tax" distortions.

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  • Keshab Bhattarai & John Whalley, 1997. "Discreteness and the Welfare Cost of Labor Supply Tax Distortions," NBER Working Papers 6280, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6280
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    Cited by:

    1. Keshab Raj Bhattarai, 2016. "Economic Growth and Development in India and SAARC Countries," EcoMod2016 9631, EcoMod.
    2. Bessho, Shun-ichiro & Hayashi, Masayoshi, 2011. "Labor supply response and preferences specification: Estimates for prime-age males in Japan," Journal of Asian Economics, Elsevier, vol. 22(5), pages 398-411, October.
    3. Ian W.H. Parry & Roberton C. Williams III & Lawrence H. Goulder, 2002. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Chapters, in: Lawrence H. Goulder (ed.), Environmental Policy Making in Economies with Prior Tax Distortions, chapter 25, pages 471-503, Edward Elgar Publishing.
    4. Olivier Bargain & Nicolas Moreau, 2002. "Is the collective model of labor supply useful for tax policy analysis ? A simulation exercise," DELTA Working Papers 2002-21, DELTA (Ecole normale supérieure).
    5. Keshab Bhattarai, 2016. "Growth and Income Distributions in Four EU Economies," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 22(3), pages 263-277, August.
    6. Chang, Wen-ya & Tsai, Hsueh-fang & Chu, Mei-Lie & Chang, Juin-jen, 2015. "On the employment, investment and current account effects of inflation: A revisit," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 278-294.
    7. María Alzúa & Guillermo Cruces & Laura Ripani, 2013. "Welfare programs and labor supply in developing countries: experimental evidence from Latin America," Journal of Population Economics, Springer;European Society for Population Economics, vol. 26(4), pages 1255-1284, October.
    8. Keshab Raj BHATTARAI, 2009. "Dynamic Multi-Household General Economic Models for Policy Simulations: France, Germany, Spain and UK," EcoMod2009 21500014, EcoMod.
    9. Frederic Vermeulen & Olivier Bargain & Miriam Beblo & Denis Beninger & Richard Blundell & Raquel Carrasco & Maria-Concetta Chiuri & François Laisney & Valérie Lechene & Nicolas Moreau & Michal Myck & , 2006. "Collective Models of Labor Supply with Nonconvex Budget Sets and Nonparticipation: A Calibration Approach," Review of Economics of the Household, Springer, vol. 4(2), pages 113-127, June.
    10. Shun-ichiro Bessho & Masayoshi Hayashi, 2005. "The CES utility function, non-linear budget constraints and labor supply : results on prime-age males in Japan," Labor Economics Working Papers 21911, East Asian Bureau of Economic Research.
    11. Toke Ward Petersen, 2001. "Indivisible Labor and the Welfare Effects of Labor Income Tax Reform," DREAM Working Paper Series 200102, Danish Rational Economic Agents Model, DREAM.

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