Bounds on Elasticities with Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply∗
نویسنده
چکیده
I derive bounds on price elasticities in a dynamic model that is mis-specified due to optimization frictions such as adjustment costs or inattention. The bounds are a function of the observed effect of a price change on demand, the size of the price change, and the degree of frictions. I measure the degree of frictions by the utility losses agents tolerate to make choices that deviate from the frictionless optimum. I apply these bounds to the literature on taxation and labor supply, allowing for frictions of 1% of consumption in choosing labor supply. Such small frictions reconcile the difference between micro and macro elasticities, extensive and intensive margin elasticities, and several other disparate findings. Pooling estimates from twenty existing studies yields bounds on the intensive margin Hicksian labor supply elasticity of (0.47, 0.54). ∗E-mail: [email protected]. I would like to thank Richard Blundell, David Card, Christopher Ferrall, John Friedman, Yuriy Gorodnichenko, James Hines, Caroline Hoxby, Guido Imbens, Patrick Kline, Adam Looney, Day Manoli, Ariel Pakes, Valerie Ramey, Emmanuel Saez, Laszlo Sandor, Harald Uhlig, and numerous seminar participants for very helpful comments. Gregory Bruich, Jane Choi, Nate Hilger, Tord Krogh, Zachary Liscow, Keli Liu, and Danny Yagan provided outstanding research assistance. Funding from NSF Grant SES 0645396 and the Sloan Foundation is gratefully acknowledged. The code used to produce the results in this paper is available on the author’s website at www.economics.harvard.edu/faculty/chetty.
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