Compensated Discrete Choice with Particular Reference to Labor Supply

45 Pages Posted: 11 Feb 2014

See all articles by John K. Dagsvik

John K. Dagsvik

Statistics Norway

Steinar Strøm

University of Oslo - Ragnar Frisch Centre for Economic Research; CESifo (Center for Economic Studies and Ifo Institute)

Marilena Locatelli

University of Turin - Department of Economics

Date Written: January 31, 2014

Abstract

Dagsvik and Karlström (2005) have demonstrated how one can compute Compensating Variation and Compensated Choice Probabilities by means of analytic formulas in the context of discrete choice models. In this paper we offer a new and simplified derivation of the compensated probabilities. Subsequently, we discuss the application of this methodology to compute compensated labor supply responses (elasticities) in a particular discrete choice labor supply model. Whereas the Slutsky equation holds in the case of the standard microeconomic model with deterministic preferences, this is not so in the case of random utility models. When the non-labor income elasticity is negative the Slutsky equation implies that the compensated wage elasticity is higher than the uncompensated one. In contrast, in our random utility model we show empirically that in a majority of cases the uncompensated wage elasticity is in fact the highest one. We also show that when only the deterministic part of the utility function is employed to yield optimal hours and related elasticities, these elasticities are numerically much higher and decline more sharply across deciles than the random utility ones.

Keywords: female labor supply, compensated discrete choice

JEL Classification: J220, C510

Suggested Citation

Dagsvik, John K. and Strøm, Steinar and Locatelli, Marilena, Compensated Discrete Choice with Particular Reference to Labor Supply (January 31, 2014). CESifo Working Paper Series No. 4591, Available at SSRN: https://ssrn.com/abstract=2393896

John K. Dagsvik

Statistics Norway ( email )

N-0033 Oslo
Norway
22 86 48 71 (Phone)

Steinar Strøm (Contact Author)

University of Oslo - Ragnar Frisch Centre for Economic Research ( email )

Gaustadalleen 21
N-0317 Oslo
Norway

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Marilena Locatelli

University of Turin - Department of Economics ( email )

Lungo Dora Siena, 100A
Torino, 10156
Italy
+39 011 6703894 (Phone)
+39 011 6703895 (Fax)

HOME PAGE: http://www.de.unito.it/web/member/locatelli/personal-inf.htm

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