# How Taxes Affect Economic Behavior

By Henry J. Aaron; Joseph A. Pechman | Go to book overview

Appendix A: Mathematical Specification of Estimation Procedure

Along each segment of the budget constraint there is a preferred number of hours of work,

:

(7)

,

where wi is the net wage on segment i, yi is virtual income for segment i, z represents socioeconomic variables, and α, β, and γ are the parameters to be estimated. For fixed α, β, and -γ, desired hours,

, may not be feasible, because may be greater or less than the hours at the end points of the budget segment Hi-1 and Hi. If desired hours are feasible, the indifference curve and the budget segment are tangent. If the budget set is convex, this tangency is unique, and I then use the stochastic specification for the deviation of actual hours from desired hours for person j as

(8)

.

Because observed hours hj ≥ 0, the stochastic term ηj is assumed to be independent truncated normal across individuals in the population. This assumption yields a Tobit specification for the hours-worked variable. However, if

= 0, I assume that the individuals choose not to work and set hj = 0. Because the final model has two sources of stochastic variation, the interpretation of ηj differs from that of the error term in standard models. Here the individual chooses, among jobs that differ in normal (long-run) hours worked, the one with working hours closest to his . But observed hj may differ because of unexpected layoffs, short time, overtime, or the worker's poor health together with measurement error. As an empirical matter, the standard deviation of ηj is reasonably small, indicating that people successfully match jobs to their desired hours of work.

If the budget set is nonconvex,

is not necessarily unique because multiple tangencies can occur between the indifference curves and the budget set. Then the particular is chosen that leads to maximum utility, which is determined by the use of the corresponding indirect utility function from equation 4. Again I use the stochastic specification of equation 6 to express the deviation of actual hours from desired hours of work. It is interesting to note that, although certain kink points such as H + ̃ in figure 5 in the nonconvex case cannot correspond to desired hours,

-65-

If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

#### Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.
Citations (0)
Some of your citations are legacy items.
Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
• Saved book/article
• Highlights
• Quotes/citations
• Notes
• Bookmarks
Notes

#### Cited page

Style
Citations are available only to our active members.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

#### Cited page

How Taxes Affect Economic Behavior

Settings

#### Settings

Typeface
Text size Reset View mode
Search within

Look up

#### Look up a word

• Dictionary
• Thesaurus
Please submit a word or phrase above.

Why can't I print more than one page at a time?

Help
Full screen
/ 456

### How to highlight and cite specific passages

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

## Cited passage

Style
Citations are available only to our active members.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

## Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.