On linking microsimulation and computable general equilibrium models using exact aggregation of heterogeneous discrete-choice making agents

Abstract

To cite this version:Riccardo Magnani, Jean Mercenier. On linking microsimulation and computable general equilibrium models using exact aggregation of heterogeneous discrete-choice making agents. Economic Modelling, Elsevier preferences/technologies. These results therefore provide a natural link between the two policy evaluation approaches. We illustrate the usefulness of these results by evaluating potential effects of population ageing on the dynamics of income distribution and inequalities, using a simple overlapping generations model where individuals make leisure/work decisions, and choose a profession among a discrete set of alternatives.JEL classification: C63; C68; C81; D31; D58; E17; J10; J22.

Tax Policies and Informality in South Africa

“…In this article, we apply a new micro-macro simulation approach to analyse the impact of different tax policies in developing countries characterised by a large informal sector and a low level of participation in the labour market. Our micro-macro model is built using the approach developed by Magnani and Mercenier (2009) based on the aggregation theory of Anderson et al (1992) that allows to aggregate the preferences of individuals facing discrete choices. We use the data from South Africa, and we assume that individuals decide whether not to work, to work in the formal sector or to work in the informal sector.…”

“…In particular, we consider two age groups (people aged less than 40 and people aged 40 and more), two education groups (highly educated and under‐educated), two race groups (Black and non‐Black) and two areas of residence (urban and rural). Following Magnani and Mercenier (), we assume that in each cell, there is a sufficiently large set N s of statistically identical and independent individuals, each of which has a total time endowment normalised to one. In particular, individuals belonging to the same cell are supposed to differ only in the GEV error terms in the utility function.…”

“…Our analysis is carried out using a new micro–macro simulation approach developed by Magnani and Mercenier () that integrates a microsimulation model and a computable general equilibrium (CGE) model and permits to evaluate the effects of a shock at the macro level, on the individual choices and on the income distribution, inequality and poverty. The approach developed by Magnani and Mercenier () is based on the exact aggregation theory of Anderson, de Palma and Thisse (), which permits to aggregate the preferences of individuals who make discrete choices into explicit labour supply functions that we introduce into a CGE model. In the literature, several articles analyse the effects of different policies using models that integrate microsimulation and CGE models applied to South Africa.…”

Dynamic Scoring of Tax Reforms in the European Union

“…The labor market plays the key role in linking the micro and macro models in our analysis. Here, we follow the analysis of Magnani and Mercenier (2009), 63 which to some extent can be seen as a simplified version of linking the micro and macro models we use in our dynamic scoring analysis, in order to ensure consistency between our discrete choice labor supply model and the labor supply modelling in QUEST. Our aim is to compare the optimal labor supply produced in the micro and macroeconomic settings, in terms of how the decision is modelled.…”

“…They show that in order to ensure consistency between the micro and macro models, whereby both models can be characterized by similar equilibrium/optimality conditions, the calibration of the macro model labor parameters (labor elasticities and labor shares, fundamentally) must be tied to the statistical parameters of the probability distribution of the micro-data. In Magnani and Mercenier (2009), as in our case, the labor market decisions at the micro level are modelled as a discrete-choice model, where choice probabilities are derived from a multinomial-logit distribution. They show that the micro and macro optimality conditions are identical if the "deep" parameter of the macroeconomic model-elasticity of substitution in the utility function-coincides with the dispersion parameter of the multinomial logit population from the discrete choice model, and the shares of time spent in leisure activities are matched to measures of the disutility of working (wage).…”