Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records

Abstract

We show that the effects of taxes on labor supply are shaped by interactions between adjustment costs for workers and hours constraints set by firms. We develop a model in which firms post job offers characterized by an hours requirement and workers pay search costs to find jobs. We present evidence supporting three predictions of this model by analyzing bunching at kinks using Danish tax records. First, larger kinks generate larger taxable income elasticities. Second, kinks that apply to a larger group of workers generate larger elasticities. Third, the distribution of job offers is tailored to match workers' aggregate tax preferences in equilibrium. Our results suggest that macro elasticities may be substantially larger than the estimates obtained using standard microeconometric methods.

The Response of Drug Expenditure to Nonlinear Contract Design: Evidence from Medicare Part D *

“…As one way to quantify the amount of excess mass, we follow the approach taken by Chetty et al (2011) and approximate the counterfactual distribution of spending that would exist near the kink if there were no kink. Specifically, we fit a cubic approximation to the CDF, using only individuals whose spending is below the kink (between $2,000 and $200 from the kink), subject to an integration constraint.…”

“…We follow a strategy used by Chetty et al (2011) and present the density of “adjusted annual spending,” which is the sum of year y ’s spending and the average “additional” January spending (in dollars). 33 As the figure shows, the bunching around the kink (seen previously in Figure IV when the spending density was plotted as a function of year y spending relative to the kink) remains when the density is plotted as a function of this “adjusted” year y spending: it would have been eliminated if the entire response was due to shifting purchasing to January.…”

“…Finally, our analysis of “bunching” at the kink is related to recent studies analyzing bunching of annual earnings in response to the non-linear budget set created by progressive income taxation (Saez 2010; Chetty et al 2011; Chetty, Friedman, and Saez 2013). This literature has emphasized that “excess mass” estimates cannot directly translate into an underlying behavioral elasticity since they also are affected by frictions – such as supply-side constraints on the choice of number of hours to work or limited awareness of the budget set in the labor supply context (Chetty et al 2011; Chetty 2012; Kleven and Waseem 2013).…”

“…This literature has emphasized that “excess mass” estimates cannot directly translate into an underlying behavioral elasticity since they also are affected by frictions – such as supply-side constraints on the choice of number of hours to work or limited awareness of the budget set in the labor supply context (Chetty et al 2011; Chetty 2012; Kleven and Waseem 2013). These frictions are likely to be substantially less important in our setting, in which individuals make an essentially continuous choice about drug spending (up to the lumpiness induced by the cost of a prescription) and get “real time” feedback on the current price they face for a drug at the point of purchase.…”

Moral Hazard in Health Insurance: Do Dynamic Incentives Matter?

“…Indeed, a large literature, going back at least to Hausman (1985), develops methods that address the difficulties that arise in modeling selection and utilization under non-linear budget sets, and applies these methods to other settings in which similar non-linearities are common, such as labor supply (Burtless and Hausman, 1978; Blundell and MaCurdy, 1999; Chetty et al, 2011), electricity utilization (Reiss and White, 2005), and cellular phones (Grubb and Osborne, forthcoming; Yao et al, 2012). …”