Scandinavian Working Papers in Economics

Working Paper Series,
Trade Union Institute for Economic Research

No 147: Identifying Interdependent Behavior in an Empirical Model of Labor Supply

Thomas Aronsson (), Sören Blomquist () and Hans Sacklén
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: 901 87 Umeå, Sweden
Sören Blomquist: Department of Economics, Uppsala University, Postal: Box 513 , 751 20 Uppsala, Sweden
Hans Sacklén: Trade Union Institute for Economic Research, Postal: FIEF, Wallingatan 38, SE-111 24 Stockholm, Sweden

Abstract: In this paper we test a particular form of interdependent behavior, namely the hypothesis that individuals´ choices of hours of work are influenced by the average hours of work in a social reference group. There are problems to empirically disentangle the effects of interdependent behavior and preference variation across groups. We show that panel data or data from several points in time are needed. In the empirical analysis we combine cross-section data from 1973, 1980 and 1990. Our results support the hypothesis of interdependent behavior. The implication is that conventional tax policy predictions, in which preference interdependencies are neglected, will tend to underestimate the effect of a tax reform on hours of work. Our point estimates suggest that conventional calculations would capture only about a third of the actual change in hours of work.

Keywords: Labor supply; interdependent preferences; nonlinear taxes

JEL-codes: C51; H31; J22

26 pages, October 28, 1998

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