Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 922: The Marginal Rate of Substitution and the Specification of Labour Supply Models

Gauthier Lanot ()
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Gauthier Lanot: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden

Abstract: In this note I revisit Heckman's proposal, [Heckman, 1974], to specify a static labour supply model using a simple formulation for the Marginal Rate of Substitution between total expenditure on consumption and hours of work. I describe the analytical form of the expenditure function and I show how the direct and indirect utility functions can be recovered. I propose an alternative specification for the MRS and in this case I describe analytically the labour supply functions, the indirect and direct utility functions as well as the expenditure function.

Keywords: Labour Supply Model; Specification; Marginal Rate of Substitution

JEL-codes: C51; D11; J22

12 pages, February 17, 2016

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