analysing behavioural responses to policy change in dynamic decision environments
TRANSCRIPT
Analysing Behavioural Responses to Policy Change in Dynamic Decision
Environments
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Outline
Alternative Approaches to Policy Analysis SIDD: A Life-cycle Model of the Household
– Outline of the model– Solution methods– Using the model
On-Going Work Directions for the Future
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Analyses of Policy
A continuum of behavioural assumptions
very broad behavioural assumptions
Back-of-an- envelope analysis
detailed statistical analysis
no formal model of behaviour
detailed statistical analysis
formal model of behaviour – uncertainty
omitted or poor accounted for
detailed numerical analysis
formal model of behaviour –
uncertainty explicitly accounted for
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SIDD: a Household Life-cycle Model
Simulator of Individual Dynamic Decisions The unit of analysis is the household Households fully described by the following
characteristics (state variables):
• age • education status
• number of adults • number and age of children
• safe liquid assets • wage rates
• pension arrangements • time of death
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SIDD: Outline
Households make decisions regarding the following (control) variables:
Uncertainty influences the following:
• consumption • labour supply
• pension scheme participation • pension contribution rates
• education participation
• number of adults • number and age of children
• wage rates • pension arrangements
• time of death
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SIDD: Outline Objective function:
where:
– intertemporal budget constraint (the entire lifetime)
– potential labour income (the working lifetime)
, ,
, ,
1
1 1/1 1/
, , , , ,,
11 1/ 1 1/ 1 1/
, , 1, 1 , 1 , 1,
, max ,
max , ,
i t i t
i t i t
Tj t
t i t i t t j t t i j i jc l
j t
i t i t t t t i t i tc l
V w h E u c l
u c l E V w h
1
1 1/ 1/ 1 1/ 1 1/, , , ,,i t i t i t i tu c l c l
tttttt clhrwww )1(1
tttt lhh 1loglog 1
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SIDD: Solving the Decision Problem
hT
wT
hT-1
wT-1
hT-2
wT-2
h1
w1
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SIDD: Solving the Decision Problem
Final period, T:– Death at the end of the period is certain, and the
household is assumed to be retired• Hence the household consumes all remaining
wealth plus any pension income, cT = wT + yT
– The values of final period consumption, utility, and marginal utility, are calculated and stored.
yT
wT
yT
wT
yT
wT
cT VT du/dcT
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SIDD: Solving the Decision Problem
In period T-1:– Two alternative approaches to solution:
1. for any internal solution, the Euler condition must be satisfied:
2. at the solution, expected lifetime utility must be maximised:
0'11
T
TTT c
urE
c
u
TTTc
T VEcuVT
1111
max
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SIDD: Solving the Decision Problem
Since we know how alternative values of c will affect the state variables in the next period, we can also obtain Et[du/dct+1] from the previously calculated grid at age T.
11
TT c
uc
hT-1
wT-1
hT
wT
du/dcT
wT-1,hT-1
Tc
u
T
TTT c
urE
c
u'1
1
cT-1
This is a deterministic solution
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SIDD: Solving the Decision Problem
hT
wT
hT-1
wT-1
hT-2
wT-2
h1
w1
time
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Advantages and Disadvantages
Advantages– Behavioural responses are based on a structural
model and therefore free of the Lucas Critique– Fully takes into account endogeneity between
alternative decisions (eg fertility and labour)– Explicitly takes into account influence of uncertainty
Disadvantages– Numerically demanding (made less of problem with
advances in computing)– Behavioural responses depend upon the validity of
assumed model (advantages of bounded rationality)
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SIDD: Using the Model The model has been designed so that its
parameters can be easily adjusted. These parameters include:– time preference for consumption
• allowance for myopia
– bequest motives – preferences for leisure– attitudes to risk– the tax structure– the pensions structure– the incidence of childcare costs
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On-going Analyses
Quasi-hyperbolic discounting and retirement behaviour
Training and later-life learning in the UK The impact of Government plans for pension
reform in the UK Analysis of the influence of decision costs on
responses to tax incentives to save Extending the model to project population
cross-sections forward through time
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Directions for the Future
Specific topics of short-term interest:– Introduce the model to Treasury in Australia– Training and education in Australia– Fertility and female labour supply decisions in
Australia Medium term objectives:
– Build in additional behavioural rigidities– Start building in macro-linkages
Others?