Welfare, labor supply and heterogeneous preferences: evidence for Europe and the US

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E SIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. Following the report of the Stiglitz Commission, measuring and comparing well-being across countries has gained renewed interest. Yet, analyses that go beyond income and incorporate non-market dimensions of welfare most often rely on the assumption of identical preferences to avoid the difficulties related to interpersonal comparisons. In this paper, we suggest an international comparison based on individual welfare rankings that fully retain preference heterogeneity. Focusing on the consumption-leisure trade-off, we estimate discrete choice labor supply models using harmonized microdata for 11 European countries and the US. We retrieve preference heterogeneity within and across countries and analyze several welfare criteria which take into account that differences in income are partly due to differences in tastes. The resulting welfare rankings clearly depend on the normative treatment of preference heterogeneity with alternative metrics. We show that these differences can indeed be explained by estimated preference heterogeneity across countries -rather than demographic composition.JEL Classification: C35, D63, H24, H31, J22

Empirical welfare analysis: when preferences matter

“…Then, Decoster and Haan [8] have proposed on German data the first application that follows the key points of the Fleurbaey and Maniquet's approach, especially the identification of heterogeneous preferences and the use of an ordinal framework. Bargain et alii [4] extend their work and propose an international comparison for 11 European countries and the US based on egalitarian equivalence criteria. Notwithstanding their breakthrough in the field, the preferences they use are still collective (based on socio-demographic variables) and not genuinely individualistic.…”

A welfare evaluation of the 1986 tax reform for married couples in the United States

“…Empirical evidence shows that secondary earners are mostly affected by changes in the tax system, whilst primary earners are subject to a different set of incentives (Triest, 1990;Blundell and Macurdy, 1999). A similar sample selection can be found in the methodological contribution of van Soest et al (2002), in Eissa and Hoynes (2004) to study the the labor force participation response of married couples to changes in the tax reforms in the US between 1984 and 1996, and in Bargain et al (2013) and Decoster and Haan (2015) to construct welfare orderings of households according to several welfare criteria.…”

“…The BoxCox specification is often assumed in welfare analysis when estimating utility functions. See, among others, Decoster and Haan (2015), Bargain et al (2013) and Blundell and Shephard (2012). The functions φ y (x y , v y ) and φ l (x l , v l ) determine the impact of observed and unobserved heterogeneity on preferences.…”

“…They are random taste shifters capturing the fact that for a given family tastes may vary across bundles j because of unobservable attributes of the bundles. As pointed out by van Soest (1995) and Bargain et al (2013), a natural way to interpret the ε j 's is unobserved alternative specific utility components, family's errors in perception of the alternative utilities, optimizations errors, or transitory situations. 8 Because of the independence assumption of the random terms, they cannot be interpreted as reflecting heterogeneous preferences due to unobserved family characteristics (van Soest, 1995).…”

“…To the best of our knowledge, this is the first attempt to evaluate a fiscal reform using different ideas of fairness embedded in the particular measure of individual well-being that is employed. Bargain et al (2013) and Decoster and Haan (2015) also use well-being indexes that are similar to those which we employ here. They do it however with different purposes: the former paper focuses on a cross-country comparison of well-being, the latter one to studies the sensitivity of different well-being rankings (in Germany) to different normative principles.…”