January 2005

IZA DP No. 1480: Cooperative Models in Action: Simulation of a Nash-Bargaining Model of Household Labor Supply with Taxation

published as 'The Impact of Tax-Benefit Reforms on Labor Supply in a Simulated Nash-bargaining Framework' in: Journal of Family and Economic Issues, 2013, 34(1), 77-86

Several theoretical contributions, starting with McElroy and Horney (1981) and Manser and Brown (1980), have suggested to model household behavior as a Nash-bargaining game. Since then, very few attempts have been made to operationalize cooperative models of household labor supply for policy analysis. In this paper, we implement a Nash-bargaining model with external threat points (divorce) into the microsimulation of tax policy reforms in France. Following the suggestion of McElroy (1990) to achieve identification, we assume that the observation of single individuals can be used to predict outside options. Individual preferences in couples are allowed to display caring between spouses and are simulated in a way which guarantee consistency with the Nash bargaining setting, regularity conditions and observed behaviors. An extensive sensitivity analysis is provided in order to examine the various implications from using the cooperative model for tax policy analysis and the likely role of taxation on intra-household negotiation.