A Model of Household Savings and Labour Supply Responses to the Policy Environment

This paper describes a structural dynamic microsimulation model of the household that has been developed at the National Institute for exploring behavioural responses to various aspects of the economic environment, particularly in relation to tax and benefits policy. The model is based upon the life-cycle theory of behaviour, which assumes that individuals make their decisions to maximise expected lifetime utility, subject to expectations that are consistent with the prevailing decision making environment. These expectations are also considered to take into account various aspects of uncertainty regarding labour incomes, rates of return, relationship status and longevity. The model is designed to minimise computational time in the context of contemporary personal computing technology, and will run on a Pentium 4 processor with 1GB of RAM.