Collective Models of Labor Supply with Nonconvex Budget Sets and Nonparticipation: A Calibration Approach

Abstract

We suggest a methodology to calibrate a collective model with household specific bargaining rules and marriage specific preferences that incorporate leisure exter nalities. The empirical identification relies on the assumption that some aspects of indi vidual preferences remain the same after marriage, so that estimation on single individuals can be used. The procedure maps the complete Pareto frontier of each household in the dataset and we define alternative measures of a power index. The latter is then regressed on relevant bargaining factors, including a set of variables retracing the potential relative contributions of the spouses to household disposable income. In its capacity to handle complex budget sets and labor force participation decisions of both spouses, this frame work allows the comparison of unitary and collective predictions of labor supply reactions and welfare changes entailed by fiscal reforms in a realistic setting (see Michal Myck et al., 2006; Denis Beninger et al., 2006).

Evaluating the Move to a Linear Tax System in Germany and Other European Countries

“…e 1 and e 2 allow the computation of the regime probabilities (see Eq. (20) in Vermeulen et al, 2006) estimated probability). The third regime is never chosen, as it never satisfies the positivity restrictions on the marginal utility of consumption.…”

“…To obtain a data set representing the collective world for Germany, we use the following two step procedure (details are given in Vermeulen et al, 2006). In the first step, we estimate preference parameters for single men and women and then predict their labour 1 Admittedly, the different types of social security contributions paid in Germany have different con sumptive aspects, and our assumption is probably more appropriate for payments to the pension system than for health insurance contributions.…”

“…For the specification of the unitary model, we adopt the analogue to the individual utility functions used in the collective model (see Vermeulen et al, 2006). In order to remain close to the situation faced by an investigator who only observes aggregate household consumption, we do not take advantage of the fact that the collective baseline situation contains each spouse's consumption (see Myck et al, 2006).…”

“…In order to account for unobservable heterogeneity in consumption, we also estimate a discrete mixture of such models (see Heckman & Singer, 1984;Hoynes, 1996) Vermeulen et al, 2006), an LR test rejects the specification with two mass points, which itself rejects the MNL specification. We conducted a descending specification search, starting with a full set of household and personal characteristics for d in b c and d and with only own characteristics plus characteristics of children in b f and b m .…”

“…The aim of the present paper is to check the robustness of these results when the collective baseline situation is generated using real world data. This is done by means of a collective model calibrated on real data as described in Frederic Vermeulen et al (2006), and by estimating a unitary model on this 'collective data set'. We focus on German data, and a revenue neutral tax reform that consists of replacing the smooth progressive tax schedule and the current means tested social benefits by a simple two parameter linear taxation system involving a basic income and a flat tax.…”