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Microsimulation Models and the Evaluation of Income Distribution Policies

Author: WanXiangZuo
Tutor: ZhangShiWei
School: Jilin University
Course: Quantitative Economics
Keywords: microsimulation income distribution public policy
CLC: F224
Type: PhD thesis
Year: 2008
Downloads: 1086
Quote: 7
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In recently years, with the deepening transformation of our country’s economic system and the continuous rapid growth of our economy, residential income disparity has been increasing all the time. The increasing income disparity has become one of the most important factors that affect our country’s social stability and economic development. The problem of income distribution has become the focus of both economic research and all aspects of our society. According to theory of public economics, government can effectively adjust residential income disparity by designing and implementing corresponding income distribution (including initial distribution and redistribution) polices. In pursuing the strategic development ambition of building a harmonious society, our government has implemented a series of related public policies aiming to adjust income distribution and advance social justice. However, the design as well as the evaluation of economic policies needs the support of macroeconomic models. Traditional macroeconomic models (macroeconomic econometric model and computable general equilibrium model) have all used typical individual or aggregate analysis pattern. Those models cannot be used in the analysis of the policies’ income distributional effect on different micro individuals as well as policies’accumulative financial effect of changes of micro individual’s status and behavior.In 1957, microsimulation method proposed by Professor Guy Orcutt provides an effective way to solve this problem. Microsimulation is the process of applying computer technology in simulating real economics and its main object of description and treatment is individual, family and firm. Half a century has passed and with the rapid development of computer technology and the increasingly rich sources of micro data, microsimulation models have achieved consistent development and perfection in many main western developed countries. More and more microsimulation models have been applied in the design and evaluation of public policies like tax and transfer, social welfare and social security, education and health care etc. Many of the microsimulation models have become the inevitable tools when designing public policies in western countries. At the same time, the microsimulation method research itself has gained great progress. The original arithmetic microsimulation model evolves into behavioral microsimulation model in combination of microeconometric methods. And it evolves into micro-macro connecting model in combination of computable general equilibrium model. And it evolves into accidental microsimulation model in combination of intelligence technology. All the new type of microsimulation models has empowered the traditional microsimulation model in the ability of problem analysis. In 1993, 1997, 1998 and 2003, four international conferences on microsimulation were held, which indicates that applying microsimulation methods in the analysis of economic policies has become a hot topic.The design and application of microsimulation models have only recently caught people’s attention in China, largely due to the lack of micro data. In recent years, some economists in our country have tried to design some experimental microsimulation models but there has not been a microsimulation model that can be used to widely and effectively evaluate public policies.We present a series of microsimulation models here in this paper (China Simulation Model, CNSM). CNSM is used in the systematic and comprehensive analysis and prediction of the income distribution policies in our country. In terms of model building, CNSM has four independent sub models. They are based on different economic conditions and different economic behavior assumptions. So they can make quantitative evaluation of the impact of public policy reforms in different time dimensions. The model design and empirical research in this paper is as follows.First, we design a static arithmetic microsimulation model (CNSM-I) to evaluate the first round effect of the changes in income distribution policies. CNSM-I includes four modules:(1) micro data processing module which is used to sample and calibrate micro data; (2) static aging module which used to transform the data in base period to destination period; (3) policy implementation module which is used to implement the detailed income distribution policy rules to micro individual; (4) policy effect analysis module which is used to make statistical estimation and evaluation of public policies. CNSM-I executes the four modules sequentially and it implements the whole process from sampling micro data, calibrating and projecting to simulating income distribution policies to estimating and evaluating of the effect of income distribution policies.By using CNSM-I as the tool of policy evaluation and using regional economic data and micro data of Jilin Provence, we make simulation research of the income tax reform, the minimum salary reform and the minimum living standard reform. Our simulation begins with the comparative analysis of the property and impact of previous income tax reforms. Then we make analysis of financial and distributional effect of income tax reform. At the same time, we clearly indicate the effect of income tax reform on the reduction of government tax income and the positive aspect on fair tax burden and adjustment of income distribution. But the reform effect quickly fails with rapid economic growth and it’s inevitable that income tax reform will undergo a consistent adjusting process. Besides, our model evaluates the impact of minimum wage policy and minimum living standard policy in terms of its direct effect. We believe that both policies have positive impact on income increasing, income inequality decreasing and poverty remission. We also propose some quantitative standard for further reform.Second, by combining microeconometric method and microsimulation method, we design a behavior microsimulation model, CNSM-II to make analysis of the short term (second round) effect of the changes in income distribution policies in our country. In this model, micro data processing, static aging, policy implementation and effect analysis modules share the corresponding module in CNSM-I. The core of our model is the simulation of micro individual’s labor supply behavior. This module has three main models:(1) salary function model which carries out estimation of unemployed individual’s wage rate and provides basis for the calculation of budget constraint;(2) budget constraint model which is used to calculate individual’s (household’s) disposable income under different behavior rule conditions;(3) discrete labor supply model which provides simulation approach to the labor supply of individual and household under different budget constraints. By applying microsimulation methods and microeconometric methods (Probit model, Truncted model and MaFadden conditional logic model etc.), we can simulate the economic behavior of micro individual and provides analysis tool for the evaluation of the short term effect of public policy reform.Based on the same micro data and policy simulation object as CNSM-I, we make simulation research of the short term effect of the changes in income distribution policy. Our experiment result indicates that: taking the income tax reform in 2006 as an example, raising the income tax threshold cannot significantly change individual’s marginal tax rate; so it has little effect on personal labor supply; raising the minimum wage has positive effect on individual’s labor supply and thus strengthens the minimum wage policy’s ability of adjusting income; raising minimum living standard has negative effect on individual’s labor supply and it induces the low-income group to a low-efficiency path and it has the effect of "poverty trap". Thus it will to some extent weaken the income adjusting and poverty saving ability of minimum living standard policy. In combination of the sensitivity simulation experiment of policy reform, we present the corresponding advice. We believe that the income tax threshold can not be too high for it will destroy the equality of tax burden and redistribution ability. The design of minimum wage standard should incorporate the micro reality in order to make sure the efficiency of the policy. As for the poverty trap effect of minimum living standard policy, we recommend its use in combination of other economic policies and we must improve the employment environment.Third, by combining the computable general equilibrium model and the microsimulation method, we design a micro-macro connecting model (CNSM-III) to make analysis of the middle term (third round) effect of the changes in income distribution policies. CNSM-III is based on micro-macro equilibrium feedback assumption and product supply (labor supply) in the market under the price (wage rate) mechanism is the feedback factor between micro and macro models. We successfully connect the micro behavior model with the macro-consistent model. The microeconomic simulation module is composed of a behavioral micro model (CNSM-III) and the macroeconomic simulation module is a realization of a computable general equilibrium (CGE) model. This CGE model is based on an input-output six sectors model in a close economy. In combination of setting the representative household (RH) and the government and through production module, consumption demand module, income distribution module and market equilibrium (close) model, we simulate the regional economic reality under general equilibrium conditions.Compared with CNSM-II, we use CNSM-III to make analysis of the middle term effect of the changes in income distribution policies. Simulations results indicate that the effect of the income tax policy reform, the minimum wage policy reform and the minimum living standard policy reform is consistent with short term effect in terms of trend. The efficiency and accuracy of policy analysis and prediction can be significantly improved by using the building pattern of macroeconomic feedback effect and economic equilibrium assumption.At last, according to economic evolving theory and by combination of agent-based computational economic method and microsimulation method, we build an agent-based microsimulation model (CNSM-IV) to make analysis of the long term effect of public policies. In CNSM-IV, the economy consists of four kinds of heterogeneous agents (household, firm, bank and government) and the economic agents interact in labor market, financial market and product market. The behavior of the economic agents is of limited rationality and economic agents learn from past experience. The dynamics of macroeconomics is the interaction between micro individuals.By applying CNSM-IV, we make analysis of long term effect of public policies by conducting public policy simulation experiment. Simulation results indicate that in the period of economic transformation, both in the perspective of income scale and income inequality, macroeconomic policies are necessary in order to prevent economic overheating and inflation; in forms of income transfer, macro financial policies can effectively enhance employment, raise residents’ income and decrease income difference. At the same time, monetary policy can impact financial market so as to affect economic growth and inflation. In the specific period of economic transformation, it surely exists the cancellation of different polices. But we believe that the combination of fiscal policy and monetary policy can exert the maximum economic effect.The research process in this paper extends the research and application of microsimulation model and the research method in this paper has model significance in the design of models on public policy evaluation and the research result in this paper has reference value in the design and evaluation of public policies in our country.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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