The labor-supply elasticity and borrowing constraints: Why estimates are biased

The labor-supply elasticity is a central element in many macroeconomic models. We argue that assumptions underlying previous econometric estimates of the intertemporal labor supply elasticity are inconsistent with incomplete markets economies. In particular, if the econometrician ignores borrowing constraints, the elasticity will be biased downwards. Within our model, the bias may be up to 50 percent. We find a similar bias in PSID data.

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Year of publication:	2001-11-29
Authors:	Domeij, David ; Floden, Martin
Institutions:	Economics Institute for Research (SIR), Handelshögskolan i Stockholm
Subject:	labor supply elasticity \| intertemporal substitution \| liquidity constraints

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Extent:	application/pdf
Series:	SSE/EFI Working Paper Series in Economics and Finance.
Type of publication:	Book / Working Paper
Language:	English
Notes:	Published in Review of Economic Dynamics, 2006, pages 242-262. The text is part of a series SSE/EFI Working Paper Series in Economics and Finance Number 480 30 pages
Classification:	C20 - Econometric Methods: Single Equation Models. General ; C50 - Econometric Modeling. General ; E20 - Consumption, Saving, Production, Employment, and Investment. General ; J22 - Time Allocation and Labor Supply
Source:	RePEc - Research Papers in Economics

Persistent link: https://www.econbiz.de/10005423882