a model to generate lifetime incomes for a population cross-section the lifetime income...
DESCRIPTION
Analytical Objectives HM Treasury and HMRC want to commission a behavioural, structural, dynamic microsimulation model, which would allow us to produce analysis in terms of lifetime incomes. The new model would allow us to simulate lifetime net incomes of a representative cross- section of the UK population, before and after a change to tax and/or benefit policy. This new model would fill a gap in our analytical capability. –Project Specification, 14 January 2012TRANSCRIPT
A model to generate lifetime incomes for a population cross-section
The Lifetime INcome Distributional Analysis Model:
LINDA
Justin van de Ven ([email protected]) Martin Weale & Paolo Lucchino
January 2014
Outline• Objectives of the analytical framework• Choice of analytical approach• Model framework• Model validation• Suitable issues for analysis• Use in practice
09:00-10:30: Presentation 10:45-12:30: Hands-on use of the model
Analytical Objectives• HM Treasury and HMRC want to commission a
behavioural, structural, dynamic microsimulation model, which would allow us to produce analysis in terms of lifetime incomes.
• The new model would allow us to simulate lifetime net incomes of a representative cross-section of the UK population, before and after a change to tax and/or benefit policy.
• This new model would fill a gap in our analytical capability.– Project Specification, 14 January 2012
Analytical Objectives• HM Treasury and HMRC want to commission a
behavioural, structural, dynamic microsimulation model, which would allow us to produce analysis in terms of lifetime incomes.
• The new model would allow us to simulate lifetime net incomes of a representative cross-section of the UK population, before and after a change to tax and/or benefit policy.
• This new model would fill a gap in our analytical capability.– Project Specification, 14 January 2012
Analytical Objectives• HM Treasury and HMRC want to commission a
behavioural, structural, dynamic microsimulation model, which would allow us to produce analysis in terms of lifetime incomes.
• The new model would allow us to simulate lifetime net incomes of a representative cross-section of the UK population, before and after a change to tax and/or benefit policy.
• This new model would fill a gap in our analytical capability.– Project Specification, 14 January 2012
Choice of Analytical Approach• Focus on the implications of policy for
lifetime net incomes motivates simulation approach– lags involved to observe lifetime incomes in
survey data• Choice of the simulation approach
characterised by two key dimensions:– simulated population– approach to modelling behaviour
Choice of Analytical Approach• Simulation alternatives in relation to the
population:– case-study– birth cohort– population cross-section at a point in time– evolving population cross-section
Choice of Analytical Approach• Simulation alternatives in relation to the
population:– case-study– birth cohort– population cross-section at a point in time– evolving population cross-section
Interested in “a representative cross-section for the UK population”
Choice of Analytical Approach• Simulation alternatives in relation to the
population:– case-study– birth cohort– population cross-section at a point in time– evolving population cross-section
Interested in “a representative cross-section for the UK population”
Choice of Analytical Approach
• A spectrum of behavioural assumptions
very broad behavioural assumptions
back of the envelope
detailed statistical analysis
no formal model of behaviour
detailed statistical analysis
formal model of behaviour –
poor approx. of uncertainty
detailed numerical analysis
formal model of behaviour –
uncertainty explicitly considered
BEHAVIOURAL ASSUMPTIONS
ANALYTICAL APPROACH
Choice of Analytical Approach• Structural
– based on a formal model of behaviour• Dynamic
– projects circumstances through time• Microsimulation
– generates temporal variation for individual decision units
• Model of the population cross-section observed at a point in time
Choice of Analytical Approach
LINDA is the first dynamic microsimulation model of the population cross-section that
uses current best-practice economic methods to project savings and labour
supply decisions through time
LINDA: A model for Whitehall• Structural model of household consumption, labour supply, and
investment decisions (van de Ven, 2013)• Life-cycle framework
– Resolution of puzzles– Motivating observations (Attanasio & Webber, 2010)
• Unit of analysis– Benefit units, defined as a single adult or adult couple, and their dependent
children (to age 17)
• Population cross-section– All adults reported by the WAS for the population cross-section of Great
Britain observed between July 2006 and June 2007
• Period of analysis– Projects at annual intervals forward and backward through time, building up a
complete life history for each adult from age 18.
LINDA: A model for Whitehall• Characteristics that distinguish benefit units- year of birth - age- relationship status - number of children by age- student status - education- self-employed/employee - wage potential reference
adult- wage potential of spouse - savings held in ISAs- eligible private pension - private pension wealth- timing of pension access - state pension based on
BSP- state pension on S2P - wealth not otherwise
defined- time of death
LINDA: A model for Whitehall• Characteristics that distinguish benefit units- year of birth - age- relationship status - number of children by age- student status - education- self-employed/employee - wage potential reference
adult- wage potential of spouse - savings held in ISAs- eligible private pension - private pension wealth- timing of pension access - state pension based on
BSP- state pension on S2P - wealth not otherwise
defined- time of death
LINDA: A model for Whitehall• Characteristics that distinguish benefit units- year of birth - age- relationship status - number of children by age- student status - education- self-employed/employee - wage potential reference
adult- wage potential of spouse - savings held in ISAs- eligible private pension - private pension wealth- timing of pension access - state pension based on
BSP- state pension on S2P - wealth not otherwise
defined- time of death
LINDA: A model for Whitehall• Decisions (utility maximising)
• Uncertainty may be considered in relation to:
- consumption - employment of each adult
- private pension participn - timing of access to pension- investments in ISAs - investments in risky assets
- relationship status - dependent children - student status - education status- self-employed/employee - wage potential- ISA investments - private pension terms- private pension wealth - other wealth- time of death
LINDA: A model for Whitehall• Decisions (utility maximising)
• Uncertainty may be considered in relation to:
- consumption - employment of each adult
- private pension participn - timing of access to pension- investments in ISAs - investments in risky assets
- relationship status - dependent children - student status - education status- self-employed/employee - wage potential- ISA investments - private pension terms- private pension wealth - other wealth- time of death
LINDA: A model for Whitehall• Decisions (utility maximising)
• Uncertainty may be considered in relation to:
- consumption - employment of each adult
- private pension participn - timing of access to pension- investments in ISAs - investments in risky assets
- relationship status - dependent children - student status - education status- self-employed/employee - wage potential- ISA investments - private pension terms- private pension wealth - other wealth- time of death
Analytical Framework• Preferences:
• Budget constraint:
• Evolution of wages:
• Dynamic programming…
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Model Validation• Model parameters and statistical implications
– Model has been parameterised to reflect a wide range of statistics estimated from survey data sources
– Model fit has been checked in a high degree of detail in conjunction with HMT (process lasting > 1 year)
– Technical details reported in Lucchino and van de Ven (2013)
• Model code structure and personnel risk – Tax and transfer code checked over with HMT analysts– Source code of remaining model held by 4 personnel at
the NIESR
Suitable Issues for Analysis• Model is an appropriate tool for considering two
types of research question:1. What are the plausible implications of a given policy
environment for the distribution of lifetime income?• How does lifetime income vary by individual characteristics
such as birth year, education, relationship status, children, etc?
2. What are plausible behavioural responses to a given change in the policy environment?• How do such effects vary by individual characteristics, and
what are the associated implications for lifetime income?
Using LINDAa brief introduction
Use of the Model in Practice• Each simulation is comprised of 4 discrete steps:
1. Define the policy environment2. Solve for utility maximising decisions for any
potential combination of benefit unit characteristics3. Simulate the circumstances of a reference
population cross-section forward and backward through time, eventually building up panel data describing the complete life-history of each.
4. Run secondary analyses on the panel data to explore issues of interest
Use of the Model in Practice• Each simulation is comprised of 4 discrete steps:
1. Define the policy environment2. Solve for utility maximising decisions for any potential
combination of benefit unit characteristics3. Simulate the circumstances of a reference population cross-
section forward and backward through time, eventually building up panel data describing the complete life-history of each.
4. Run secondary analyses on the panel data to explore issues of interest
• Key to using the model appropriately is to allow sufficient time for stage 4
Use of the Model in Practice1. Defining the policy environment
– Excel front-end to facilitate variation of selected model parameters
– Programming access to tax and benefits structure
Use of the Model in Practice1. Defining the policy environment
– Excel front-end to facilitate variation of selected model parameters
– Programming access to tax and benefits structure
4. Analysing model output:– Excel summary statistics– Panel data for the simulated population
Use of the Model in Practice1. Defining the policy environment
– Excel front-end to facilitate variation of selected model parameters
– Programming access to tax and benefits structure
4. Analysing model output:– Excel summary statistics– Panel data for the simulated population