Accounting for Limited Commitment between Spouses when Estimating Labor-Supply Elasticities

The Frisch elasticity of labor supply can be estimated by regressing hours worked on<br>the hourly wage rate, controlling for consumption of the individual worker. However,<br>most household panel surveys contain consumption information only at the household<br>level. We show that proxying individual consumption by household consumption biases<br>estimated Frisch elasticities downward as limited commitment in the household induces<br>individual consumption to behave differently from household consumption. We develop<br>an improved estimation approach that eliminates this bias by exploiting information on<br>the composition of household consumption to infer its distribution. Using PSID data, we<br>estimate Frisch elasticities of about 0.65 for men and 0.8 for women.<br><br>