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QUANTITATIVE METHODS
QUANTITATIVE METHODS
5 Microsimulation
Mathias André
Abstract
Microsimulation is a quantitative method for estimating the expected impact of an intervention (e.g. the modification of a tax rate) and describing its effects (winners, losers, budgetary envelope, effect on inequality indicators). It is based on taking into account the characteristics of the target population (e.g. age, income, etc.) and modelling public policy effects concerning this population. Because of the diversity of situations that it makes it possible to integrate, this technique provides more precise and complete results than estimates based on average or aggregate reasoning of the representative individual type. Its development has been encouraged by the improvement in computing power and the increase in statistical information (surveys or administrative data). It is an essential tool for ex ante evaluation of the impact of public policies and can also be used for ex post evaluation.
Keywords: Quantitative methods, modeling, static/dynamic microsimulation, demography, socio-fiscal policies, pensions
I. What does this method consist of?
Microsimulation is a method developed by research institutions or government agencies by modelling economic agents, mainly individuals or companies, for the purpose of evaluating public policies. It was developed to address the limitations of macroeconomic analysis, which relies on a single agent representative of the economy (Orcutt, 1957). The general principle is based on the representation of the economy as a collection of elementary units (e.g. individuals) with specific characteristics (e.g. age, marital status, family size, income). As opposed to modelling on the basis of an average individual, this approach allows for the measurement of variation among individuals and the modeling of changes in their situations.. For example, dynamic methods that model simulate the birth, aging, and death of individuals, which may be useful for assessing pension systems. Other models can study the effect of changes in taxes or social benefits on household disposable income. This is the purpose of socio-fiscal microsimulation. In other words, the microsimulator will use a variety of observed data and simulate changes in situations, unit by unit, either through deterministic relationships (if family benefits increase, households with children see their income increase) or probabilistic relationships (each year, children are born with a certain probability). Microsimulation is said to be dynamic if it incorporates phenomena such as demographic changes (ageing, fertility, mortality) or adjustments in different markets (employment, trade, etc.); it is otherwise said to be static.
Microsimulation relies on computer software to model the range of socio-economic situations. It uses dedicated statistical softwares (e.g. R or Python) to process both the individual data and to write the model itself. The model simulates situations based on observed variables and