Microsimulation as a tool for evaluating redistribution policies

Abstract

1During the last twenty years, microsimulation models have been increasingly applied in qualitative and quantitative analysis of public policies. This paper provides a discussion on microsimulation techniques and their theoretical background as a tool for the analysis of public policies with particular attention to redistribution and social policies. Basic principles in using microsimulation models and interpreting their results are analyzed, with particular emphasis on tax incidence, redistribution and poverty analysis. Social welfare analysis permitted by microsimulation techniques is also discussed. Finally, the paper points to limits of present approaches and directions for future research.

Microsimulation and Policy Analysis

“…In general terms, a microsimulation approach allows the research to conduct a "controlled experiment" by changing the parameters of interest while holding everything else constant and avoiding endogeneity problems in identifying the direct effects of the policy under analysis (Bourguignon and Spadaro, 2006). The use of tax-benefit microsimulation models to calculate counterfactual states and scenarios underpins much micro-economic analysis of the causal impact of fiscal policy reforms.…”

“…One might expect labour supply and fertility to be affected and, depending on the specifics of the system and the change in it, so might other dimensions of behaviour. As Bourguignon and Spadaro (2006) point out, it is important to be clear about when these second order effects can, and cannot, be neglected. We return to this issue in section 3.3 below.…”

“…Nevertheless, it is important to be clear when the second order effects can, and cannot, be neglected. To capture the individual welfare effect of reforms, it is not always necessary to quantify behavioural responses, on the assumption that the effects of the policy changes are marginal to the budget constraint (Bourguignon and Spadaro, 2006). Of course it is not possible to judge a priori whether the behavioural response is large or ignorable.…”

“…Nevertheless, it is widely recognised that, depending on the policy change being analysed, ignoring behavioural reactions can lead to misleading estimates of the impact of the policy reform on the income distribution and the macro-economic consequences (Bourguignon and Spadaro, 2006), as is also illustrated by the tax planning example.…”

Analysing the effects of tax-benefit reforms on income distribution: a decomposition approach

“…It is based on the construction of appropriate counterfactual distributions using microsimulation. 4 The change in the distribution of disposable income -summarized by poverty or inequality measures -is decomposed into three types of e¤ects: the change in tax-bene…t policy structure, the change in the nominal levels of policy parameters relatively to change in income levels, and other changes not directly linked to taxbene…t policies. The last e¤ect includes changes in the distribution of gross income, its composition between di¤erent sources (capital income, labour income, replacement income, etc.…”