Research Paper No. 688

WELFARE, NON-LINEAR BUDGET CONSTRAINTS AND BEHAVIOURAL MICROSIMULATION

by

John Creedy & Alan Duncan

April 1999

Department of Economics. University of Melbourne. Parkville Victoria 3052 Australia

ABSTRACT

This paper provides a technical survey of recent developments in behavioural microsimulation. We discuss the criteria by which models of labour supply may be chosen for application to behavioural microsimulation, and consider how such models may be augmented to control for fixed costs, child-related work costs, preference heterogeneity and endogeneity in wages. We describe methods by which non-linear budgets constraints may be accommodated in estimation, in policy simulation, and in welfare analysis, and discuss how stochastic terms may be factored into the simulation of behavioural responses to some policy shock.
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