RESEARCH PAPER NO. 799
MEASURING WELFARE CHANGES WITH NONLINEAR BUDGET CONSTRAINTS IN CONTINUOUS AND DISCRETE HOURS LABOUR SUPPLY MODELS
by
John Creedy & Guyonne Kalb
JULY 2001
Department of Economics. University of Melbourne. Melbourne Victoria 3010 Australia
ABSTRACT
This paper examines the computation of exact welfare measures in the context of labour supply models. It is suggested that the standard method of computing compensating and equivalent variations does not allow sufficiently for the nonlinearity of the budget constraint. An exact method is suggested. The method is applied to contexts in which individuals are allowed to vary their hours continuously and where only a limited number of discrete hours of work are available. Discrete hours models have in recent years been used in view of the substantial econometric advantages when estimating the parameters of direct utility functions.
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