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Traditional approach

Traditional approach. max U(C, h) s.t. C=f(wh, I) h 0,T] where: C = net income h = hours of work w = wage rate I = other income T = total available time f( ) = tax rule. Our approach. max U(C, h, z) s.t. C=f(wh, I) (h, w, z)  B where: z = other job characteristics

dalton-franks
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Traditional approach

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  1. Traditional approach max U(C, h) s.t. C=f(wh, I) h0,T] where: C = net income h = hours of work w = wage rate I = other income T = total available time f( ) = tax rule

  2. Our approach max U(C, h, z) s.t. C=f(wh, I) (h, w, z)  B where: z = other job characteristics B = opportunity set

  3. Traditional model: max U(C, h) s.t. C = f(wh, I) h0,T] Our model: max U(C, h, z) s.t. C = f(wh,I) (h, w, z) B The approach we use is different from the traditional approach

  4. The opportunity set in the traditional approach w h T 0

  5. The opportunity set in our approach (illustrative example) w 5 3 20 40 2 30 80 20 h 0

  6. The opportunity set contains different number of jobs with different characteristics • This is taken into account by specifying a frequency or density function: • m(h,w) = density of jobs with hours and wage (h,w).

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