B United Kingdom North America Japan India Malaysia - China

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1 HANDBOOK OF MICROSIMULATION MODELLING CATHAL O'DONOGHUE Rural Economy and Development Programme, Teagasc, Athenry, Ireland B United Kingdom North America Japan India Malaysia - China

2 List of Contributors ListofTables List of Figures About the Authors xvii xix xxi xxiii CHARTER 1 INTRODUCTION 1 Cathal O'Donoghue 1.1 Introduction Target audience Modelling complexity Overview of the handbook Population complexity Behavioural complexity Temporal and spatial complexity Policy complexity Unit of analysis Future directions 16 Acknowledgement 17 References 18 CHAPTER 2 HYPOTHETICAL MODELS 23 Irina Burlacu, Cathal O'Donoghue and Denisa Maria Sologon 2.1 Introduction Context and uses Context of the hypothetical models Policy scope Geographica! scope Analytical scope 33

3 2.3 Methodological characteristics and choices Interaction with another model Unit of analysis Period of analysis Unit of Variation Analytical measure Methods to update the underlying attributes Limitation«2.4 Summary and future directions References J< CHARTER 3 STATIC MODELS 47 and Ann Harding 3.1 Introduction 3.2 The use of static microsimulation models Policy scope Geographie scope Analytical scope Methodological characteristics and choices Parameterisation in static microsimulation models Baseline data in static microsimulation models Indexation and updating Updating tax-benefit rules Reweighting Projections and static ageing Maintenance and other issues 3.4 Summary and future directions References CHARTER 4 MULTI-COUNTRY MICROSIMULATION Holly Sutherland 4.1 Introduction 4.2 Context 4.3 Methodological characteristics and choices A fundamental choice Software Data Simulations 4.4 Uses and applications Comparisons of the effects of existing policies Comparisons of the effects of policy changes P & <90 ao <92 <9,9 <99 94

4 4.4.3 Supra national microsimulation Summary and future directions 98 Acknowledgements 100 References 100 CHARTER 5 DECOMPOSING CHANGES IN INCOME 107 DISTRIBUTION Olivier Bargain 5.1 Introduction Context Tax-Benefit Microsimulation Assessing the Effect of Policy Changes Using Decomposition by Income Types Assessing the effect of policy changes using microsimulation Methodological characteristics and choices Methodology Choice of nominal adjustments Choice of definition of the policy effect Other choices Data requirements and tax-benefit microsimulation Uses and applications Quantifying the contribution of past policy reforms Sensitivity to base versus end year data and approximating future policy effects Summary and future directions 127 References 128 CHARTER 6 DISTRIBUTIONAL CHANCE DÜRING 135 DEVELOPMENT B. Essama-Nssah 6.1 Introduction Context Methodological considerations A characterization of the Statistical approach A nonparametric method Using regression models Using reduced-form models The structural approach Applications Change in the distribution of eamings Change in the distribution of household income 155 ix

5 x Contents Growth incidence analysis Analysis of the impact of shocks and policy interventions Summary and future directions 160 Acknowledgments 162 References 162 CHAPTER 7 LABOUR SUPPLY MODELS 167 Rolf Aaberge and Ugo Colombino 7.1 Introduction Microsimulation meets microeconometrics A frame of reference Modelling strategies The 'Reduced Form' approach The structural 'Marginalist' approach The random utility maximization approach How reliable are structural models? Policy Simulation Producing Simulation outcomes Examples of simulations addressing specific policies or issues Identifying optimal systems Social evaluation of policy simulations Individual welfare functions Social welfare functions - the primal and dual approach Socially optimal income taxes Conclusions and future perspectives 205 References 206 CHAPTER 8 CONSUMPTION AND INDIRECT TAX 223 MODELS Bart Capeau, Andre Decoster and David Phillips 8.1 Introduction What is the role of indirect tax micro-simulation models? Methodological issues and choices Coverage of the model The core modelling assumptions what changes in response to a reform? Welfare and distributional analysis Data requirements and processing Examples of indirect tax micro-simulation models 251

6 8.4.1 Indirect tax micro-simulation in MEXTAX Indirect tax micro-simulation in EUROMOD Summary and future directions 259 References ^ Technical appendix 26< > Using expenditures and retail prices to model excise duties 2^ Approximations to welfare measures of indirect tax reforms 266 Using the Cobb-Douglas indirect Utility Function and Expenditure Function to Calculate Welfare Effects -269 Engel Curves 2?0 Welfare Effects with the QU AIDS Demand System 271 CHAPTER 9 MACRO-MICRO MODELS 275 John Cockburn, Luc Savard and Luca Tiberti 9.1. Introduction Context Methodological characteristics and choices The representative household approach The fully integrated approach The top-down micro-accounting approach The top-down with behaviour approach The bottom-up approach The iterative approach Choice of approach Data considerations Uses and applications Structural adjustment programmes Trade liberalization Poverty-reduction policies Fiscal reform Agricultural policies Labour market policies Environmental policies Summary and future directions Behavioural content Social dimensions of well-being Education Health Demographics Rehabilitating the FI approach 294

7 Acknowledgments References Appendix: The Aggregation Problem 2% 2% 304 CHAPTER 10 DYNAMIC MODELS 305 Jinjing Li, Cathal O'Donoghue and Gijs Dekkers Introduction Uses and applications Methodological characteristics and choices Base dataset selection Cohort model or population model Ageing method in dynamic microsimulation Discrete or continuous time modelling Open versus closed model Link between micro- and macro-models Links and integrations with agent based models Modelling transitions and behaviours Alignment with projections Model complexity Model Validation Summary and future directions Progress of dynamic microsimulation modelling since 1970s Obstacles in the advancement of microsimulation, and some possible solutions Future directions Conclusion 332 References 333 CHAPTER 11 DEMOGRAPHIC MODELS 345 Carl Mason 11.1 Introduction Agent-based modeling? Demographic macrosimulation Demographic microsimulation: applications Long term changes in fertility and mortality Rules, preferences, and household formation HIV Indirect estimation of demographic quantities 350

8 11.3 Methodological issues SOCSIM Closed and open populations Time Rates over time Events Marriage queues # Homogamy and Spousal Age Difference Heterogeneity Rate independent population subgroups Rate multipliers # Future directions 360 References 361 CHARTER 12 SPATIAL MODELS 367 Robert Tanton and Graham Clarke 12.1 Introduction Context Methodological characteristics and choices Classification of spatial microsimulation models Benchmarks Synthetic reconstruction methods Reweighting approaches Choosing a method Validation Uses and applications Summary and future directions 376 References 377 CHARTER 13 TRANSPORTATION MODELS 3&? Eric J. Miller 13.1 Introduction 3&? 13.2 Context 3& Microsimulating travel demand Microsimulating route choice and network Performance Road network modelling Transit network modelling Pedestrian and bicycle modelling Population (agent) synthesis Summary and future directions 412 References 413 xiii

9 xjv Contents CHAPTER 14 HEALTH MODELS Deborah Schofield, Hannah Carter and Kimberley Edwards Introduction Health expenditure Spatial models of health and disease 42J Mortality Health workforce 4# Future developments 4# Conclusions 4J9 References 440 CHAPTER 15 ENVIRONMENTAL MODELS 449 Stephen Hynes and Cathal O 'Donoghue 15.1 Introduction Policy context Uses and applications Distributional incidence analysis of environmental policy Spatial incidence environmental models Agriculture and the environment Resource demand Transport and land use Non-market valuation studies Methodological characteristics and choices Distributional incidence of environmental outcomes or policy Modelling pollution and environmental pollution Macro-micro model linkages Unit of analysis Scope and spatial disaggregation Environmental valuation Benefit transfer Summary and future directions 465 References 4<57 CHAPTER Introduction Context FIRM LEVEL MODELS Hermann Buslei, Stefan Bach and Martin Simmler M

10 16.3. Methodological characteristics and choices What choices are available? What are the data requirements? Uses and applications Basic government models Advanced approaches for forecasting and policy analysis Microsimulation as a component of broader academic studies Summary and future directions 499 References 500 CHARTER 17 FARM LEVEL MODELS 505 James W. Richardson, Thia Hennessy and Cathal O'Donoghue Introduction Policy context Applications Hypothetical analyses Policy analysis Impact of macro-economic change Labour supply Spatial models Environmental analysis Methodological choices Farm-level Monte Carlo Simulation Optimisation modelling Farm-level policy Simulation modelling Farm-level spatial modelling Conclusions and future directions 526 References 526 xv