Empirical Economics

, Volume 22, Issue 3, pp 431-460

First online:

A Monte Carlo evaluation of labor supply models

  • Peter EricsonAffiliated withDepartment of Economics, Göteborg University
  • , Lennart FloodAffiliated withDepartment of Economics, Göteborg University

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In the area of labor supply and taxes advanced microeconometric methods have been developed in order to measure wage and income elasticities. Large variations in estimated elasticities have previously been reported in the literature. The purpose of the present study is to assess the sources for these discrepancies, and propose a robust estimator. According to our findings the commonly used maximum-likelihood estimator is sensitive to measurement errors in those variables that are needed in order to construct the individuals' budget sets. An iterative least squares estimator is preferred in small samples under several forms of specification and measurement errors.

Key Words

Labor supply Monte Carlo simulation

JEL Classification System-Numbers

C15 J22