Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 20/2013: Compensated Discrete Choice with Particular Reference to Labor Supply

John K. Dagsvik (), Steinar Strøm () and Marilena Locatelli ()
Additional contact information
John K. Dagsvik: Statsistics Norway and the Frisch Centre, Postal: Ragnar Frisch Centre for Economic Research, Gaustadalléen 21 , N-0349 Oslo , Norway
Steinar Strøm: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Marilena Locatelli: University of Turin and the Frisch Centre, Oslo, Postal: Ragnar Frisch Centre for Economic Research, Gaustadalléen 21 , N-0349 Oslo , Norway

Abstract: Recently Dagsvik and Karlström (2005) have demonstrated how one can compute Compensating Variation and Compensated Choice Probabilities by means of analytic formulas in the context of discrete choice models. In this paper we offer a new and simplified derivation of the Compensated probabilities in the case with independent random utility models. Subsequently, we discuss the application of this methodology to compute compensated labor supply responses (elasticisities) in discrete labor supply models. Whereas the Slutsky equation holds in the case of the standard microeconomic model with deterministic preferences, this is not so in the case of random utility models. Note that since the non-labor income elasticity is negative the Slutsky equation implies that the compensated wage elasticity is higher than the uncompensated one. With a random utility model we show empirically that in many cases the uncompensated wage elasticity is in fact the highest one.

Keywords: Female labor supply; compensated wage elasticities in RUM

JEL-codes: C51; J22

36 pages, August 24, 2013

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