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Nonlinear budget set regressions for the random utility model
Working paper   Open access

Nonlinear budget set regressions for the random utility model

Nils Sören Blomquist, Anil Kumar, Che-Yuan Liang and Whitney K Newey
NBER working paper series, Vol.31194
National Bureau of Economic Research
04/2023
DOI: 10.3386/w31194
url
https://doi.org/10.3386/w31194View
Open Access

Abstract

This paper is about the nonparametric regression of a choice variable on a nonlinear budget set under utility maximization with general heterogeneity, i.e. in the random utility model (RUM). We show that utility maximization and convex budget sets make this regression three dimensional with a more parsimonious specification than previously derived. We show that nonconvexities in the budget set will have little effect on these results in important cases. We characterize all the restrictions of utility maximization on the budget set regression and show how to check these restrictions in applications. We formulate budget set effects that can be identified by this regression and give automatic debiased machine learners of these effects. We consider use of control functions to allow for endogeneity. Throughout we take as the main example the effect of taxes on taxable income including accounting for productivity growth. In an application to Swedish data we find the taxable income elasticity of a change in the slope of each segment to be .52, that the regression satisfies the restrictions of utility maximization at the values chosen for over 95% of observations, and that a productivity growth rate we estimate is close to other estimates.
 Econometrics Economics Labor Economics Econometric models Economic aspects Labor supply Taxation

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