, Volume 22, Issue 3, pp 431-460

A Monte Carlo evaluation of labor supply models

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Abstract

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.