Contents

24.1. IntroductionandOverview 2142

24.1.1 WhatisMicrosimulation? 2142

24.1.2 Microsimulation in the Economic Literature 2144

24.1.3 SummaryofChapter 2146

24.2. What Does Microsimulation Add to Analysis of Income Distribution and Redistribution? 2150

24.2.1 Enriching Existing Microdata 2150

24.2.1.1 AddingInformation 2150

24.2.1.2 TheUnitofAnalysis 2152

24.2.2 Microsimulation-Based Indicators 2153

24.2.2.1 IndicatorsofWorkIncentives 2153

24.2.2.2 Indicators of Automatic Stabilization 2155

24.2.2.3 IndicatorsofHouseholdCompositionEffects 2157

24.3.

24.3.1 ABasicExample 2158

24.3.2 Formal Framework 2159

24.3.2.1 DecomposingStaticPolicyEffects 2159

24.3.2.2 SpecificApplications 2164

24.3.2.3 DecompositionWithLaborSupplyChanges 2166

24.3.3 Modeling Behavioral Changes 2167

24.3.3.1 Accounting for Individual Reactions 2167

24.3.3.2 Labor Supply Models 2169

24.3.4 Macroeconomic Effects 2172

24.3.5 Predicting Income Distribution 2174

24.3.5.1 Modeling Changes in Labor Market Status 2174

24.3.5.2 Nowcasting 2176

24.3.5.3 Forecasting 2178

24.3.6 CrossCountryComparisonsUsingMicrosimulation 2179

24.4. Challenges and Limitations 2182

24.4.1 Reconciling Simulated Income with Recorded Income and Macro Statistics 2182

24.4.2 Modeling Non-Take-Up and Noncompliance 2186

24.4.3 Assessing the Reliability of Microsimulation Estimates 2190

24.5. Broadening the Scope 2192

24.5.1 Extended Income, Consumption and Indirect Taxes 2192

24.5.2 Dynamic Microsimulation and Lifetime Redistribution 2196

24.5.3 Crossing Boundaries: Subnational and Supranational Modeling 2198

Handbook of Income Distribution, Volume 2B

© 2015 Elsevier B.V.

All rights reserved. 2141

ISSN 1574-0056, http://dx.doi.org/10.1016/B978-0-444-59429-7.00025-X

24.6. ConclusionsandOutlookfortheFuture 2200

24.6.1 What Has Been Achieved So Far? 2200

24.6.2 Data and Methodological Developments 2202

24.6.3 The Case for a Collaborative Approach 2204

Acknowledgments 2205

Appendix A. Increasing UK Child Benefit in 2001 and 2013: The Net Effects 2205

Appendix B. Comparison of Simulated Estimates of Income Tax with Administrative Statistics, UK 2010-2011 2207

References 2210