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Working Paper
Nonlinear Budget Set Regressions for the Random Utility Model
This paper is about the nonparametric regression of a choice variable on a nonlinear budget set when there is general heterogeneity, i.e., in the random utility model (RUM). We show that utility maximization makes this a three-dimensional regression with piecewise linear, convex budget sets with a more parsimonious specification than previously derived. We show that the regression allows for measurement and/or optimization errors in the outcome variable. We characterize all of the restrictions of utility maximization on the budget set regression and show how to check these restrictions. We ...
Working Paper
Estimating Taxable Income Responses with Elasticity Heterogeneity
We extend a standard taxable income model with its typical functional-form assumptions to account for nonlinear budget sets. We propose a new method to estimate taxable income elasticity that is more policy relevant than the typically estimated elasticity based on linearized budget sets. Using U.S. data from the NBER tax panel for 1979-1990 and differencing methods, we estimate an elasticity of 0.75 for taxable income and 0.20 for broad income. These estimates are higher than those obtained by specifications based on linearization. Our approach offers a new way to address the problem of ...