Accounting for Behavioral Effects in Microsimulation: A Reduced Form Approach

Microsimulation models are used worldwide to assist in the policy-making of governments. The simulation models may be purely non-behavioral or they may also include modules that simulate labor supply responses to the policy change in question. The present paper demonstrates how the practitioner can employ exogeneously given response estimates to account for behavioral effects in this type of work. Response estimates are combined with individual changes in work incentives at both the extensive and intensive margins. The concepts of the participation tax rate (PTR) and the effective marginal tax rate (EMTR) are employed. In the empirical illustration we discuss distributional and social welfare effects arising from the changes in Finnish taxes and benefits that took effect in 2020. <br>