Microsimulation and Policy Analysis

Abstract

ISER Working Paper Series www.iser.essex.ac.uk Microsimulation and Policy AnalysisNon-technical summary This paper is prepared as a chapter forthcoming in the Handbook of Income Distribution, Volume 2 (edited by A. B. Atkinson and F. Bourguignon, Elsevier-North Holland). Microsimulation methods are increasingly used to study the effects of policies on the income distribution contributing both to policy debates and academic literature. In general terms, microsimulation refers to modelling changes in the state or behaviour of micro-level units. We provide an overview of approaches that address questions related to the impact of taxbenefit policies on household income distribution. We first discuss how microsimulation modelling contributes to the analysis of the income distribution more broadly, pointing out that it can enrich survey and administrative data by checking its consistency, adding further details and enhancing analytical flexibility. In addition, it provides the basis for calculating indicators that cannot otherwise be estimated directly from micro-data such as measures of work incentives, net support for children and automatic stabilisers embedded in tax-benefit systems. We then focus more specifically on the role of microsimulation in policy evaluation. Taxbenefit models can provide information on household disposable income and its components under various policy scenarios and as such constitute a unique tool for ex ante policy analysis, though equally can be used for ex post analysis. We review the formal framework underlying such microsimulation-based decomposition analysis of income distribution and suggest a broader perspective to accommodate a wider range of applications. Our main emphasis is on static modelling methods, though we also consider extensions accounting for behavioural reactions and links with macroeconomic models. As microsimulation models are often concerned with current and future policies, we discuss various approaches to predict the income distribution given that data providing information on the current situation becomes available with a time lag, distinguishing between nowcasting and forecasting. We emphasise the role of comparative analysis as cross-country differences in tax-benefit systems and population structures provide a basis to assess the robustness of results and generalise conclusions. We provide empirical illustrations drawing mainly on analysis using the EU-wide tax-benefit model EUROMOD. Covering 27 countries and made generally accessible this is now one of the most widely used models. There are many remaining challenges to providing estimates of the effects of policy and policy changes that can be used with confidence within policy analysis and we consider three major issues: reconciling the simulated income distribution and that measured using the original micro-data; accounting for benefit non take-up and tax non-compliance, as well as validating and assessing the statistical reliability of microsimulation estimates. While our main focus is on the distributio...

A model-based framework for probabilistic simulation of legal policies

“…RELATED WORK Legal policy simulation. As we discussed in the introduction, there are a number of legal policy simulation tools in the area of applied economics, e.g., [1], [2]. These tools do not adequately address the expertise gap between legal experts and system analysts.…”

“…(1) Class selection and instantiation (L. [1][2][3][4][5][6][7][8][9][10][11][12][13][14]. If the «use existing» stereotype is present, SDG attempts to return an object from already-existing ones (L. 2-4).…”

“…In applied economics, this type of simulation falls within the scope of microsimulation. Microsimulation encompasses a variety of techniques that apply a set of rules over individual units (e.g., households, physical persons, or firms) to simulate changes [1]. The rules may be deterministic or stochastic, with the simulation results being an estimation of how these rules would work in the real world.…”

“…Existing legal policy simulation frameworks, e.g., EURO-MOD [1] and ASSERT [2], use a combination of spreadsheets and software code written in languages such as C++ for implementing legal policies. Directly using spreadsheets and software code nevertheless complicates the validation of the implemented policies.…”

Model-Based Simulation of Legal Requirements: Experience from Tax Policy Simulation

“…Several tools exist in the field of applied economics for policy simulation, e.g., SYSIFF [21], POLIMOD [22], and EUROMOD [23]. These tools use a combination of spreadsheets and software code for specifying legal policies.…”