Calibration of Household Preference Parameters

Behavioral Assumptions

Elasticity of labor supply

As discussed in the OG-Core household theory documentation, we use the elliptical disutility of labor function developed by [Evans and Phillips, 2017]. We then fit the parameters of the elliptical utility function to match the marginal disutility from a constant Frisch elasticity function. OG-PHL users enter the constant Frisch elasticity as a parameter. [Peterman, 2016] finds a range of Frisch elasticities estimated from microeconomic and macroeconomic data. These range from 0 to 4. Peterman makes the case that in lifecycle models without an extensive margin for employment the Frisch elasticity should be higher. For OG-PHL we take a default value of 0.4 from [Altonji, 1986].

Intertemporal elasticity of substitution

The default value for the intertemporal elasticity of substitution, \(\sigma\), is taken from [Attanasio et al., 1999]. We set \(\sigma=1.5\).

Rate of time preference

We take our default value for the rate of time preference parameter, \(\beta\) from [Carroll, 2009]. We set the value to \(\beta=0.96\) (on an annual basis).

Frisch elasticity of labor supply

We take our default value for the Frisch elasticity of labor supply as \(\nu=0.25\). This value was estimated by [McNelis et al., 2009] (see p. 19).