Journal of Economic Perspectives
ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)
The Econometrics of Kinked Budget Constraints
Journal of Economic Perspectives
(pp. 119–139)
(Complimentary)
Abstract
In the last several years, a branch of applied econometrics has developed that is devoted to the development of techniques for the estimation of demand and other functions when the budget constraint is "piecewise-linear,+ or "kinky"—that is, when the constraint consists of a number of segments joined together at kink points. Such constraints most frequently arise from government tax and transfer programs. But kinked constraints sometimes arise in nongovernment contexts, a well-known example being the block pricing schedule commonly set by utilities and volume discounting in general. Kinked budget constraints create two difficulties. First, changes in tax and transfer schedules can have unexpected effects that can be exactly the opposite in sign to those expected from economic theory. Examples of this phenomenon are given below. Second, kinked budget constraints make the estimation of demand functions quite difficult.Citation
Moffitt, Robert. 1990. "The Econometrics of Kinked Budget Constraints." Journal of Economic Perspectives 4 (2): 119–139. DOI: 10.1257/jep.4.2.119JEL Classification
- C51 Model Construction and Estimation
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
- H31 Fiscal Policies and Behavior of Economic Agents: Household
- J22 Time Allocation and Labor Supply
- J26 Retirement; Retirement Policies