Chapter 2 Dynamic Microsimulation for Policy Analysis: Problems and Solutions

Microsimulation is a technique that uses the capacity of modern computers to make microunits act and interact in such a way that it is possible to aggregate to the level of interest. A microsimulation model can be seen as a set of rules, which operates on a sample of microunits such as individuals, households, and firms. Each microunit is defined and characterized by a set of properties (variables) and as the model is simulated these properties are updated for each and every microunit. The model might simply be a set of deterministic rules such as the income tax rules of a country operating on a sample of taxpayers, and used to compute the distribution of after-tax income, the aggregate income tax revenue, or other fiscal entities of interest. But the model could also include behavioral assumptions usually formulated as stochastic models. Examples are fertility models, models for household formation and dissolution, labor supply, and mobility.