A Monte Carlo evaluation of discrete choice labour supply models

Abstract

This paper is based on a Monte Carlo simulation in order to evaluate the properties of the discrete labour supply model. The data is generated by a continuous model and a discrete choice model is estimated assuming a translog utility function. The robustness of the results for different number of points in the discrete choice set, as well as for measurement errors in income and hours are compared. The discrete model produces similar results as the ‘true’ continuous model and apart from large measurement errors in hours these results are robust.

Notes

This is the coherency problem discussed in Kapteyn et al. (1990).

The differentiable approximation approach, suggested by MaCurdy et al. (1990), suggests an alternative to circumvent some of the deficiencies of PWL approach.

In this paper unobserved heterogeneity in the estimation is not allowed.