SSE/EFI Working Paper Series in Economics and Finance
No 480:
The labor-supply elasticity and borrowing constraints: Why estimates are biased
David Domeij ()
and Martin Floden ()
Abstract: The labor-supply elasticity is a central element in many
macroeconomic models. We argue that assumptions underlying previous
econometric estimates of the intertemporal labor supply elasticity are
inconsistent with incomplete markets economies. In particular, if the
econometrician ignores borrowing constraints, the elasticity will be biased
downwards. Within our model, the bias may be up to 50 percent. We find a
similar bias in PSID data.
Keywords: labor supply elasticity; intertemporal substitution; liquidity constraints; (follow links to similar papers)
JEL-Codes: C20; C50; E20; J22; (follow links to similar papers)
30 pages, November 29, 2001
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- This paper is published as:
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Domeij, David and Martin Floden, (2006), 'The labor-supply elasticity and borrowing constraints: Why estimates are biased', Review of Economic Dynamics, Vol. 9, No. 2, pages 242-262
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