Public Economics Lectures Part 1: Introduction

Extensive vs. Intensive Margin
Related issue: want to understand effect of taxes on labor force
participation decision
With fixed costs of work, individuals may jump from non-participation
to part time or full time work (non-convex budget set)
This can be handled using a discrete choice model:
P = φ(α + ε log(1 − τ) − ηy)
where P ∈ {0, 1} is an indicator for whether the individual works
Function φ typically specified as logit, probit, or linear prob model
Note: here it is critical to have tax variation; regression cannot be run
with wage variation
Public Economics Lectures ()Part 5: Income Taxation and Labor Supply 13 / 217