How revealing is revealed preference?

This lecture address the following two key criticisms of the empirical application of revealed preference theory: When the RP conditions do not reject, they do not provide precise predictions; and when they do reject, they do not help characterize the nature of irrationality or the degree/direction of changing tastes. Recent developments in the application of RP theory are shown to have rendered these criticisms unfounded. A powerful test of rationality is available that also provides a natural characterization of changing tastes. Tight bounds on demand responses and on the welfare costs of relative price and tax changes are also available and are shown to work well in practice

The employment effects of the Working Families Tax Credit

In October 1999 WFTC replaced Family Credit as the main package of in-work financial support for families with children. This note compares the results of three IFS projects assessing the effectiveness of the WFTC in getting people back to work

Employment, hours of work and the optimal design of earned income tax credits

This paper examines the optimal schedule of marginal tax rates and the design of earned income tax credits. The analysis is based on a structural labour supply model which incorporates unobserved heterogeneity, fixed costs of work and the detailed non-convexities of the tax and transfer system. An analytical framework is developed that allows explicitly for an extensive margin in work choices and also the partial observability of hours of work. This is contrasted to the standard case in which only earnings (and non-labour income) are observable to the government. The empirical motivation is the earned income tax credit reforms in Britain which include a minimum hours requirement at 16 hours per week and a further bonus at 30 hours. Our analysis examines the case for the use of hours-contingent payments and lends support for the overall structure of the British tax credit reforms. However, we also provide a strong case for a further reduction of marginal rates for lower earners but only those with school age children

Heterogeneity and the nonparametric analysis of consumer choice: conditions for invertibility

This paper considers structural nonparametric random utility models for continuous choice variables. It provides sufficient conditions on random preferences to yield reduced- form systems of nonparametric stochastic demand functions that allow global invertibility between demands and random utility components. Invertibility is essential for global identifcation of structural consumer demand models, for the existence of well-specified probability models of choice and for the nonparametric analysis of revealed stochastic preference

A nonparametric test of exogeneity

This paper is concerned with inference about a function g that is identified by a conditional moment restriction involving instrumental variables. The function is nonparametric. It satisfies mild regularity conditions but is otherwise unknown. The paper presents test of the hypothesis that g is the mean of a random variable Y conditional on a covariate X. The need to test this hypothesis arises frequently in economics. The test does not require nonparametric instrumental-variables (IV) estimation of g and is not subject to the ill-posed inverse problem that nonparametric IV estimation entails. The test is consistent whenever g differs from the conditional mean function of Y on a set of non-zero probability. Moreover, the power of the test is arbitrarily close to 1 uniformly over a set of functions g whose distance from the conditional mean function is O(n^{-1/2}) where n is the sample size

Endogeneity in nonparametric and semiparametric regression models

This paper considers the nonparametric and semiparametric methods for estimating regression models with continuous endogenous regressors. We list a number of different generalizations of the linear structural equation model, and discuss how two common estimation approaches for linear equations — the "instrumental variables" and "control function" approaches — may be extended to nonparametric generalizations of the linear model and to their semiparametric variants. We consider the identification and estimation of the "Average Structural Function" and argue that this is a parameter of central interest in the analysis of semiparametric and non- parametric models with endogenous regressors. We consider a particular semiparametric model, the binary response model with linear index function and nonparametric error distribution, and describes in detail how estimation of the parameters of interest can be constructed using the "control function" approach. This estimator is applied to estimating the relation of labor force participation to nonlabor income, viewed as an endogenous regressor

Employment, hours of work and the optimal taxation of low income families

This paper examines the tax schedule for low income families with children. We take an optimal tax approach based on a structural labour supply model which incorporates unobserved heterogeneity, fixed costs of work, childcare costs and the detailed non-convexities of the tax and transfer system. The motivation is the British earned income tax credit reform (WFTC) and its interaction with the tax and transfer system for lone parents. Our analysis also examines the case for the use of hours-contingent payments. The results point to a tax schedule which depends on the age of children, with tax credits only optimal for low earners with school age children. The results also suggest a welfare improving role for hours-contingent payments although this is mitigated when hours cannot be monitored or recorded accurately by the tax authorities