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Practical Econometrics
Series editors
Jurgen Doornik and Bronwyn Hall
Practical econometrics is a series of books designed to provide accessible and

practical introductions to various topics in econometrics. From econometric
techniques to econometric modelling approaches, these short introductions
are ideal for applied economists, graduate students, and researchers looking
for a non-technical discussion on specific topics in econometrics.
Books published in this series
An Introduction to State Space Time Series Analysis

Jacques J. F. Commandeur and Siem Jan Koopman
Non-Parametric Econometrics
Ibrahim Ahamada and Emmanuel Flachaire
Econometric Methods for Labour Economics

Stephen Bazen
A Practical Guide to Price Index and Hedonic Techniques

Ana M. Aizcorbe

Cathal O’Donoghue
Practical
Microsimulation
Modelling
Cathal O’Donoghue
1
1
Great Clarendon Street, Oxford, OX2 6DP,
United Kingdom
Oxford University Press is a department of the University of Oxford.
It furthers the University’s objective of excellence in research, scholarship,
and education by publishing worldwide. Oxford is a registered trade mark of
Oxford University Press in the UK and in certain other countries
© Cathal O’Donoghue 2021
The moral rights of the author have been asserted
First Edition published in 2021
Impression: 1
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, without the
prior permission in writing of Oxford University Press, or as expressly permitted
by law, by licence or under terms agreed with the appropriate reprographics
rights organization. Enquiries concerning reproduction outside the scope of the
above should be sent to the Rights Department, Oxford University Press, at the
address above
You must not circulate this work in any other form
and you must impose this same condition on any acquirer
Published in the United States of America by Oxford University Press
198 Madison Avenue, New York, NY 10016, United States of America
British Library Cataloguing in Publication Data
Data available
Library of Congress Control Number: 2021935786
ISBN 978–0–19–885287–2
DOI: 10.1093/oso/9780198852872.001.0001
Printed and bound by
CPI Group (UK) Ltd, Croydon, CR0 4YY
Links to third party websites are provided by Oxford in good faith and
for information only. Oxford disclaims any responsibility for the materials
contained in any third party website referenced in this work.
Dedicated to my peers and students in the microsimulation community

Preface
This book describes the lessons that I have learnt over the course of developing
my skills as a microsimulation modeller and co-generating knowledge and
experience with Ph.D. and master’s students and with industry clients.
While I have built many models over the course of my career, the research
in this book draws on lessons from four models:
• SWITCH–the tax-benefit microsimulation model of the Economic and

Social Research Institute, in Dublin, Ireland (Callan et al. 1996)
• EUROMOD–the European tax-benefit model (Immervoll et al. 1999;
Immervoll and O’Donoghue 2009; Sutherland and Figari 2013)
• LIAM–Lifecycle Income Analysis Model (dynamic microsimulation
framework) (O’Donoghue et al. 2009; de Menten et al. 2014)
• SMILE–Simulation Model of the Irish Local Economy (spatial micro-
simulation model) (O’Donoghue et al. 2012)
Figure 0.1 describes my knowledge-tree equivalent to a genealogical tree

of these models and their link to earlier models in the literature.
Dynamic Static
USA UK AUS Spatial
1960’s Orcutt 1961
1970’s DYNASIM I/II
TAXMOD
1980’s CORSIM LIFEMOD IFS Taxben
PENSIM
DYNACAN POLIMOD
HARDING
1990’s SWITCH
DYNAMOD
SVERIGE
SAGEMOD
LIAM EUROMOD
POLISIM PENSIM2
EU Leeds
2000’s MIDAS x 3
DYNASIM III APPSIM
SMILE
LIAM2
Figure 0.1 Model Knowledge Tree

viii Preface
These models span many of the main methodological areas of micro-

simulation modelling, covering static, dynamic, cross-country, and spatial
models. Starting with static modelling, which ignores behaviour, time, and
place, the first model I worked on was the SWITCH static microsimulation
model at the Economic and Social Research Institute, in Dublin, Ireland,
working with Tim Callan and his team to develop and use the Irish SWITCH
static tax-benefit model (Callan et al. 1996). This work was heavily influ-
enced by the Institute for Fiscal Studies’ Taxben model (Blundell et al. 2000).
Extending the dimensionality of the modelling to incorporate the time
dimension in a dynamic microsimulation model, I developed a dynamic-
cohort model LIAM (O’Donoghue 2002) during a Ph.D. at the London
School of Economics (LSE), under the supervision of Celia Phillips and Jane
Falkingham. LIAM built upon the family of dynamic-cohort models devel-
oped at the LSE for the UK (LIFEMOD, Falkingham and Hills 1995) and
Australia (HARDING, Harding 1993). This model was also influenced by the
work of Steve Caldwell at Cornell University (where I had the pleasure of
spending some time during the course of my Ph.D.), who developed the
CORSIM model (Caldwell 1996). Caldwell’s model is a direct link to the first
microsimulation models in the field, when he partnered with Guy Orcutt
(Orcutt et al. 1958; Orcutt 1960) on the DYNASIM model at the Urban
Institute, Washington DC, in the early 1970s.
Caldwell had a particular way of building very sophisticated models with
relatively limited resources, working with Ph.D. students and with partners
in other countries. One of these partnerships was with the Canadian govern-
ment to build the DYNACAN model, along with Rick Morrison and his
team (Caldwell and Morrison 2000). The joint meetings between CORSIM–
DYNACAN teams were one of the leading fora for the exchange of know
ledge in dynamic microsimulation modelling at the time.
I also worked with Holly Sutherland’s team at the Microsimulation Unit, in
the Department of Applied Economics, University of Cambridge, together
with partners such as Tony Atkinson and Francois Bourguignon, to create a
cross-country microsimulation model, EUROMOD (Atkinson et al. 2002).
Other partners, such as Gert Wagner at the Deutsches Institut für
Wirtschaftsforschung (DIW),1 provided a link back to the cutting-edge Sfb3
models in Germany in the 1980s (Galler and Wagner 1986). In addition, the
early version of the EUROMOD framework was developed together with
Herwig Immervoll, who now heads up microsimulation analysis at the OECD
(Immervoll and O’Donoghue 2009), although later versions are more flexible
1 German Institute for Economic Research.

Preface ix
and powerful (Sutherland and Figari 2013). Extensions of EUROMOD

involved collaborations with Andre Decoster to incorporate modelling con-
sumption and indirect tax (Decoster et al. 2010), and also collaborations
with Ugo Colombino to incorporate labour supply (Colombino et al. 2010).
Extending microsimulation modelling to incorporate the spatial dimen-
sion, I developed, on returning to Ireland, SMILE, working in partnership
with Graham Clarke and Dimitris Ballas of the University of Leeds (Ballas
et al. 2005). SMILE has a focus on rural- and agricultural-policy analysis
(O’Donoghue et al. 2013). In parallel, my Ph.D. framework, LIAM
(O’Donoghue et al. 2009), was generalized to be applied to other countries
(Dekkers et al. 2010), which eventually led to the development of a new and
faster, more-powerful framework, LIAM2 (de Menten et al. 2014), with the
methodologies influencing the development of the UK’s dynamic-
microsimulation model Pensim2, at the Department of Work and Pensions
(Edwards 2010; O’Donoghue et al. 2010).
Progress in research is based on building upon the achievements and
learnings of others. Much of the learning in microsimulation has been by
word of mouth, via interpersonal interactions, or via documentation in con-
ference proceedings or books, many of which are now out of print, such as
the excellent Orcutt et al. (1986).
Without personal interactions with leading figures in this fast-growing
and relatively novel field, it would have been more challenging for me to
develop these models. In essence, I had to rely largely on an oral exchange of
knowledge and experience. Across the microsimulation field, much of the
knowledge has been transmitted verbally between people on teams, at con-
ferences, and through networks. In developing further, the microsimulation
field faces a challenge to find more-effective ways of transferring knowledge.
In transferring knowledge, there are two main types of knowledge transfer:
• codified knowledge, where specific knowledge is written down

• tacit knowledge, where more-abstract information may be more difficult
to transmit
For much of the period since the foundation of the field, knowledge has
been codified mainly through the following forms:
• documentation that aims to facilitate other team members utilizing

the models
• published material, mainly books and conference presentations, which
may have been non-peer reviewed, had limited coverage, and often
went out of print
x Preface
• documents that may have only been available to those who attended an
event and were rarely included in the usual citation indices and search-
able databases
• papers published in peer-reviewed formats, which were typically in
journals where the focus was on the application rather than the
methodology
A significant proportion of the methods used in the field are not formally
codified, meaning that new models have had to reinvent the wheel and
redevelop existing methods over and over again. Where methods were for-
mally codified, they were often codified in non-peer-reviewed technical notes
or discussion papers and thus lack the quality assurance that peer review can
help to achieve. Another issue is that publication in a research-centre tech
nical paper or note carries risks associated with the ending of funding, retire-
ment of staff, or the end of the life of a model. Thus, there is a sustainability
risk for the field in respect to its core methodological foundations.
A classic example of this is the methodology in relation to alignment, used
in dynamic microsimulation models. It is a calibration mechanism used to
align simulated totals to external control totals, and has been used since the
1970s. It is, thus, a core methodology within the field. However, there is rela-
tively little documentation or guidance as to how to undertake alignment.
Where it exists, it is published in non- peer-reviewed technical papers
(Bækgaard 2002) as team-specific internal documentation (Johnson 2001;
Morrison 2006), conference papers (Kelly and Percival 2009; Chénard 2000a),
or in relatively hard-to-find volumes based on conferences (Neufeld 2000;
Chénard 2000b). It should be noted that all these references date from 2000
onward, despite the methodology being used since the 1970s. Most are not
peer reviewed and most are hard to find, and, given the dissolution of some of
the teams, are impossible to access. One of the first peer-reviewed journal art
icles that aims to assess the performance of a part of the methodology was only
published in 2014 (Li and O’Donoghue 2014). This chapter covers the align-
ment of only a single variable type. Is it any wonder that the methodology has
received serious criticism (Winder 2000)?
It is arguable that the development of a method cannot be trusted until it
has been road-tested through publication and rigorous peer review. There is,
thus, a need for a literature to be developed to document, test, and provide
rigorous quality assurance for the alignment of the many other variables that
are found in the literature. The example above cites an issue in relation to one
specific aspect of the methodology. This criticism could be extended to many
other methods used within the field of microsimulation.
Preface xi
This book is an attempt to codify and describe many of the main tech-
niques utilized in microsimulation modelling, and to present examples of
how they are used.
I am grateful both to my many peers in the field of microsimulation and to
students that I have learned from and taught over the past twenty-five years.
I am also grateful to helpful comments by anonymous referees and to my
colleague Mary Ryan for extensive comments on the draft document. I hope
this book provides a helpful guide for those wishing to develop models
within the field. I would like to acknowledge the understanding and support
of Rosaleen and Jude as I prepared this book.
Table of Contents
List of Figures xvii

List of Tables xix
PART I. INTRODUCTION
1. Introduction 3
1.1 Introduction 3
1.2 Types of Microsimulation Models 12
1.3 Overview 23
2. Xlsim: Developing A Software Tool to Assist Training and
Learning In Microsimulation Modelling 25
2.1 Introduction 25
2.2 Theoretical Objectives 26
2.3 Software Evaluation For A Microsimulation Development 31
2.4 Methodology: The Computing Framework Of Xlsim 40
2.5 Summary 45
2.6 Appendix 46
PART II. STATIC MODELS

3. Anti-Poverty Policy 63
3.1 Introduction 63
3.2 Policy Design: The Design of social Transfer 64
3.3 Data Issues: Creating the Base Dataset 71
3.4 Validation: Hypothetical Families 74
3.5 Measurement Issues: Poverty Efficiency 76
3.6 Simulation: Introducing An Anti-Poverty Instrument 85
4. Redistribution and Income-Tax Reform 88
4.1 Introduction 88
4.2 Policy Context: Structure of Income-Tax Systems 89
4.3 Data Issues: Net to Gross Imputation 95
4.4 Validation: External Data 98
4.5 Measurement Issues: The Distributional Impact of Taxation Analyses 100
4.6 Simulation: Modelling Taxes and Contributions 106
xiv Table of Contents
PART III. BEHAVIOURAL MODELS

5. Labour-Supply Behaviour 115
5.1 Introduction 115
5.2 Policy Context: In-Work Benefits 121
5.3 Data Issues: Preparation of Data For Labour-Supply-Choice
Modelling122
5.4 Validation: Derivation of Unobserved Residuals for
Simulation131
5.5 Measurement Issues: Replacement Rates 133
5.6 Simulation: Modelling the Behavioural Impact of Increasing
an In-Work Cash Transfer 140
6. Indirect Taxation and Consumption Behaviour 150
6.2 Policy Context: Indirect Taxation 152
6.3 Data Issues: Linking Income and Expenditure Surveys 153
6.4 Measurement Issues: Modelling A Behavioural Response 157
6.5 Simulation: Income and Indirect Taxation 165
7. Environmental Taxation 173
7.2 Policy Context: Environmental Taxation 175
7.3 Data Issues: Modelling Pollution 177
7.4 Measurement Issues: Direct and Indirect Impacts of
Environmental Taxation 178
7.5 Simulation: Welfare Impact of A Carbon Taxation 181
PART IV. DYNAMIC AND SPATIAL MODELS

8. Decomposing Changes in Inequality Over Time 191
8.2 Policy Context: Decomposition Of Inequality 193
8.3 Data Issues: Income-Generation Model 194
8.4 Measurement Issues: Shapley-Value Decomposition 205
8.5 Simulation: Oaxaca–Blinder–Bourguignon Decomposition 206
8.6 Validation Issues 210
9. Pension Reform and Life-Course Distributions 213
9.2 Policy Context: Pensions and Ageing 214
9.3 Data and Modelling Issues 216
9.4 Validation: Alignment 225
9.5 Measurement Issues: Inter-Temporal Redistribution 228
9.6 Simulation: Distribution Of Income Over The Life Course 230
Table of Contents xv
10. Spatial Inequality 239

10.2 Policy Context: Spatial Inequality And Poverty 241
10.3 Data Issues: Matching Spatial Data and Micro-Data 243
10.4 Validation: Conditional Independence and Spatial Calibration 251
10.5 Measurement Issues: Spatial Inequality 260
10.6 Simulation: Modelling The Spatial Distribution of Income
in Ireland 261
References 267
Index 297
List of Figures
0.1 Model Knowledge Tree vii

1.1 Sources of Complexity in Policy Design and Evaluation 6
1.2 Enhanced Complexity in Inter-Temporal and Spatial Microsimulation
Models7
1.3 Unemployment Trap from Means Testing 8
1.4 Poverty Trap 9
1.5 Reducing the Poverty Trap 10
1.6 Hypothetical Model 13
1.7 Static Tax-Benefit Model 15
1.8 Labour-Supply Behavioural Models 17
1.9 Consumption-Behaviour-Based Models 18
1.10 Environmental Models 19
1.11 Decomposing-Inequality Model 21
1.12 Dynamic Microsimulation Models 22
1.13 Spatial Microsimulation Models 23
2.1 Model Structure 45
2.2 Parameter Worksheet 53
2.3 The Command Sheet 56
3.1 Social-Benefit Modules 65
3.2 Replacement Rates 69
3.3 Means Tests 70
3.4 UK Tax-Benefit System 75
3.5 Sensitivity of Poverty Line to Assumptions 81
3.6 The Efficiency of Social Transfers 84
3.7 Monthly Gross-Income Budget Constraint of Benefit Simulations
on Couple with Two Children 86
4.1 Tax Allowances and Credits 92
4.2 Gini Coefficient 102
4.3 Redistribution and Progressivity 103
4.4 Tax and Social-Insurance Contributions 107
4.5 Monthly Net-Income Budget Constraint of Benefit Simulations on
Couple with Two Children 107
xviii List of Figures
4.6 Lorenz and Concentration Curves 109

4.7 Average Tax Liability for Joint and Individual Taxation for Single-Earning
Married Couples 110
4.8 Marginal Effective Tax Rates for Joint and Individual Taxation 110
5.1 Equity-Efficiency Trade-Off 116
5.2 Non-Linear Budget Constraint (Unemployment and Poverty Traps) 124
5.3 Hours Distribution 143
5.4 Budget Constraint for Couple with Children 144
5.5 Distribution of Marginal Effective Tax Rates 145
5.6 Marginal Effects for Income and Hours for Model 1 148
6.1 Budget Elasticities 169
6.2 Budget Shares 170
6.3 Own-Price Elasticities 171
7.1 Structure of an Environmental Microsimulation Model 174
7.2 Efficient Pollution Abatement for a Single Polluting Firm 175
8.1 National Accounts and Employment Rate 1996–2016 195
8.2 Change in the Budget Constraint 2004–12 205
8.3 Sensitivity of Order of Simulation on Change in Gini Coefficient 2007–12 210
8.4 Inequality Pathways 2007–12 211
9.1 Age-Group-Profile Structure of Those in Employment 232
9.2 Employment Rate of Those Aged 16–65 232
9.3 Cohort Employment Rate 233
9.4 Simulation Properties of Employment 235
9.5 Simulation Properties of Employment Model 3 236
9.6 Simulation Properties of Employment 237
9.7 Employment Profile 238
9.8 Lifetime Distribution of Disposable Income 238
10.1 Simulated Average-Equivalized Household Disposable Income at the
District Level 263
List of Tables
2.1 Microsimulation Functionality of Different Software Tools 33

2.2 Characteristics of Different Software 34
2.3 General Structure of Tax Benefit Rules Worksheet 51
3.1 Benefit Rules 85
3.2 Poverty-Efficiency Statistics 87
4.1 Contribution and Tax Rules 106
4.2 Progressivity and Redistribution 109
5.1 CCT or In-Work Transfer Payment 127
5.2 Choice Attributes for CCT 128
5.3 Data Selection for Labour Supply 142
5.4 Multinomial Logit for Labour-Participation-Supply Model 146
5.5 Conditional Logit for Labour-Supply Model 147
5.6 Simulation of a 50-Per-Cent Increase in the Level of Payment of an
In-Work Benefit 149
6.1 Budget Shares 167
6.2 Budget Elasticities 167
6.3 Frisch Parameters 168
6.4 Own-Price Elasticities 168
6.5 Distributional Statistics 171
6.6 MRC 172
7.1 Ratios of Carbon Dioxide and Energy to Expenditure by Fuel 179
7.2 Fuel as a Share of Expenditure by Decile 182
7.3 Percentage Direct and Indirect Increase in Prices of Consumption Goods
Due to Carbon Tax 183
7.4 Distribution of Share of Expenditure Type 184
7.5 First-Round Impact of Carbon Tax (Carbon Tax as a Proportion of
Expenditure)184
7.6 Own-Price Demand Elasticities 185
7.7 Tax as a Percentage of Total Expenditure and Disposable Income 186
7.8 Change in Expenditure on Goods as a Result of Indirect Carbon Tax
(as Percentage) 186
xx List of Tables
7.9 Percentage Change in Carbon Emissions by Decile 187

8.1 Changes in the Distribution of Equivalized Disposable Income 2007–12 203
8.2 Occupation and Industry Share 2007–12 204
8.3 Distributional Characteristics of Market Income 204
8.4 Regression Coefficients by Education 2007–12 207
8.5 Decomposing Change in Gini Coefficient of Equivalized Disposable Income 208
8.6 Equivalized Household Income under Different Pathways 209
8.7 Decomposing Change in Gini Coefficient of Equivalized Disposable Income 212
10.1 Urban Versus Rural Market and Disposable Income 264
10.2 Between- and Within-Group Inequality by Income Component 264
PART I
INTRODUCTION
1
Introduction
1.1 Introduction
Public policy design increasingly expects and relies upon a body of evidence
to make decisions. Better evidence can produce better and more focused
policies. It can allow for better targeting of resources, improving the cost of
achieving a particular policy objective, or improving the effectiveness of a
policy for a given resource. Targeted policy interventions require better
information on who is affected, how they are affected, and where those who
are affected are located. For example, a transfer programme targeted at a
group that are generally poor, such as the elderly, may cost more than an
instrument that is targeted on the basis of income, and so is targeted specif
ically at the poor. However, this targeting or means testing may introduce
negative incentives. Thus, designing effective policy requires a micro-based
unit of analysis, containing information on how a policy will affect individ
uals differentially.
While there is a large range of methodologies utilized in undertaking
evidence-based policy analysis, they can be classified broadly into the fol
lowing categories:
• Ex-post analysis (Heckman et al. 1999; Todd 2007; Vedung 2017;

Benhassine et al. 2015), focusing on evaluating the impact of a policy
after it has been implemented.
• Ex-ante analysis, assessing the potential impact before roll out (Hertin
et al. 2009; Figari et al. 2015; De Agostini et al. 2018).
Increasing use is being made of pilot initiatives using randomized experi

ments and then evaluated using ex-post methods, for example in the case of
the main worldwide pilot projects for child-related conditional cash-transfer
programmes (see Gertler 2004; Fernald et al. 2008; Pearce and Raman 2014;
Haskins and Margolis 2014). However, political constraints and/or time or
resource constraints frequently do not allow this to take place. Thus ex-ante
simulation-based methods are often used for public policy design as they are
cheaper, being undertaken on a computer without incurring large piloting
Practical Microsimulation Modelling. Cathal O’Donoghue. Oxford University Press. © Cathal O’Donoghue 2021.
DOI: 10.1093/oso/9780198852872.003.0001
4 Introduction
costs. They are less accurate than ex- post methods as the structure of
behaviour may change in response to policy instrument or they may be
based upon historical data. However, the methodology may be the only one
possible in many circumstances.
Microsimulation modelling is a potential simulation-based tool with a
micro-unit of analysis that can be used for ex-ante analysis (O’Donoghue
2014). It is a micro-based methodology, typically utilizing micro-data units
of analysis, for example taking surveys or datasets containing micro-units
such as households, individuals, firms, and farms, etc. It is a simulation-
based methodology that utilizes computer programs to simulate public
policy and economic or social changes on the micro-population of interest.
While microsimulation models have taken firms (Eliasson 1991; Buslei et al.
2014) or farms (O’Donoghue 2017) as the micro-unit of analysis, most have
carried out analysis at the level of individuals or households (see Mot 1992;
Sutherland and Figari 2013)
As a research field, microsimulation has its roots in the work of Guy
Orcutt (1957, 1961). However, it was only the advent of the personal com
puter in the 1980s and the availability of micro-data that have allowed the
field to develop. Whether formally defined as microsimulation modelling or
not, micro-based, ex-ante simulation-based analysis is now used extensively
around the world for policy analysis and design.
There have been a number of survey articles written such as Merz
(1991, 1994), Mot (1992), Martini and Trivellato (1997), Bourguignon and
Spadaro (2006), Dekkers and van Leeuwen (2010), and Anderson and Hicks
(2011). Generally, Sutherland (1995) covered static models; Klevmarken
(1997) behavioural models; O’Donoghue (2001), Zaidi and Rake (2001),
Spielauer (2007), and Li and O’Donoghue (2013) dynamic models; Rahman
and Harding (2016), Rahman et al. (2010), Hermes and Poulsen (2012),
Tanton and Edwards (2013), Tanton (2014), and O’Donoghue et al. (2014)
spatial models; Creedy and Duncan (2002), Creedy and Kalb (2005), and
Bargain and Peichl (2013) labour supply models; Figari and Tasseva (2013) a
special issue on the cross-country EUROMOD model; Brown (2011) health
models; and Ahmed and O’Donoghue (2007), Cockburn et al. (2010), and
Bourguignon et al. (2010) covered macro-micro models. The O’Donoghue
(2014) handbook brings together developments across a variety of different
areas. Given the growth in microsimulation over the past twenty years, there
is a need for a text book to assimilate this literature and describe the develop
ment and implementation of current practice in the microsimulation field.
Public policy is broad, with many objectives and associated targets.
Microsimulation modelling can in principle be applied to assess the micro
impact of many policy areas, subject to data availability and to the capacity
Introduction 5
to quantify the impact of the policy. This book will focus primarily on
policies associated with the distribution of income such as poverty, income
inequality, and labour supply incentives. These are the areas in which the
methodology has seen most use over time. However, there are also many
other areas in which the methodology has been widely used, particularly in
the areas of transport (Miller 2014), health (Schofield et al. 2014), urban
planning (Waddell et al. 2003), and farm-level modelling (O’Donoghue 2017;
Shrestha et al. 2016).
Microsimulation models can be produced in different programming
environments. Relatively simple models can be programmed in Microsoft
EXCEL, while more sophisticated models use statistical software such as SAS
or Stata, or programming languages such as C++, VB, and Java (Hancock
1997). There are no specific software packages for undertaking microsimula
tion, but a number of frameworks have been used to build m odels for differ
ent purposes, for example the EUROMOD (Immervoll and O’Donoghue
2009), MODGEN (Spielauer 2011), and LIAM2 (De Menten et al. 2014)
frameworks.
Other modelling methods, such as computable general equilibrium
models (CGE) (De Melo 1988; Van Ruijven et al. 2015), overlapping gener
ations models (OGM) (Lambrecht et al. 2005; Bommier and Lee 2003), or
agent-based models (Tesfatsion and Judd 2006; Gatti et al. 2018), incorpor
ate behaviour in a more detailed or consistent way than microsimulation
models, but typically do not have the same heterogeneity of population or
detail in relation to policy. Linking these models with microsimulation
models can generate some of the advantages of both methods, illustrated by
attempts to link more detailed behavioural models such as CGE (Cockburn
et al. 2014) with microsimulation models.
1.1.1 Complexity and Microsimulation Models
As a modelling framework, microsimulation modelling is a mechanism of

abstracting from reality to help us understand complexity better. Figure 1.1
outlines potential sources of complexity in a static, single- time-period
microsimulation model.
In the context of policy design and evaluation, complexity can take the
form of:
• population structure
• behavioural response to the policy
• policy structure
6 Introduction
Population
Policy Behaviour
Figure 1.1 Sources of Complexity in Policy Design and Evaluation
These levels of complexity themselves interact with each other, resulting in

a degree of complexity that is difficult to disentangle without recourse to
a model.
Consider first the dimension of complexity, for example policy complexity
or the range of different policy or socio-economic impacts. Many microsim
ulation models try to replicate the fine detail of legislation in their simula
tions, as opposed to a more generic form of simulation. These include the
areas of tax and benefit policy, indirect taxation, health policy, pension pol
icy, rural policy, transport policy, or macroeconomic change. Different geo
political contexts may influence the nature of the policy complexity. For
example, the set of policies simulated in an OECD country may be different
to those simulated in a developing country, with the former typically having
a greater reliance on income-related systems such as income taxation and
means-tested benefits, and the latter being more reliant on consumption-
based taxes and in-kind instruments.
The next dimension of complexity in relation to population is whether an
analysis takes place on a population with limited or extensive heterogeneity.
Many analyses focus merely on the impact of policy on typical families,
abstracting almost entirely from population complexity, such as the OECD
tax- benefit model based upon workers at the average production wage
(Immervoll and Pearson 2009). Another dimension of population complex
ity considered is the unit of analysis. Some microsimulation models have
taken businesses such as firms (Buslei et al. 2014) or farms (O’Donoghue 2017)
as the micro-unit of analysis, however most have carried out analysis at the
level of individuals or households (Bourguignon and Spadaro 2006).
The third dimension of complexity is behaviour. Many policies are expli
citly aimed at influencing behaviour, as in the case of work incentives, in-
work benefits, or environmental incentives. Models that abstract from
behavioural response are known as static microsimulation models, while
models that incorporate behaviour include labour participation and supply,
consumption decisions, benefit take-up, tax evasion, transport decisions, or
farm- and firm-level investment decisions.
Introduction 7
Inter-temporal Microsimulation Models Spatial Microsimulation Models
Population Population
Behaviour Policy Behaviour Policy
Time Place
Figure 1.2 Enhanced Complexity in Inter-Temporal and Spatial Microsimulation Models
In the case of models that incorporate either spatial dimensions

(O’Donoghue et al. 2014) or inter-temporal dimensions (Li and O’Donoghue
2013), the level of complexity is further increased (Figure 1.2). Land use and
spatially targeted policy or spatially targeted socio-economic effects require
spatial models. Analysis of policies which depend upon long-term contribu
tion histories, such as pensions and long-term care policy, or require long-
term repayments (as in the case of education financing), utilize inter-temporal
or dynamic models.
Finally, across all dimensions there may be an interest in understanding
the performance of policies in different country contexts. Multi-country
models and comparative analyses have been developed to analyse such ques
tions of differential complexity.
1.1.2 Population Complexity
Policy analysis frequently tries to understand how a policy will impact the
‘average’ family. The OECD’s average production worker examination of com
parative tax and social policy is an example of such analysis (Pearson &
Scarpetta 2000; Burlacu et al. 2014). However, familiarity with micro-data
makes one realize that there is in fact no average family, such as a single-earner
couple with children and living on the average wage. For example, looking at
the structure of the Irish population in 2005 using the Survey of Income and
Living Conditions, there are 33.5 per cent of the population living in house
holds defined as a couple with children. Of these, 13.1 per cent are single-
earner couples and of these less than 2 per cent have earnings at or close to the
average wage. Thus, the so called ‘average’ contains only a tiny fraction of the
population, reflecting the high degree of heterogeneity-derived complexity
8 Introduction
within the population. Decomposing into other dimensions, such as time or

income source, further add to this complexity. For this reason, policy analysts
require micro-datasets containing representative samples of the population.
1.1.3 Policy Complexity
Public policy often starts with simple objectives, perhaps in response to a

crisis or a specific social-policy objective. However, unexpected effects or
‘mission creep’ can often lead to a policy becoming more complicated. Take
for example an anti-poverty strategy. A desire to reform poor laws in Britain
and Ireland saw the introduction of contribution- based unemployment
insurance to combat poverty in 1911. However, the cost of extending the
instrument to fill coverage gaps saw the introduction of means- tested
unemployment assistance in 1933 (Figure 1.3). This added further complex
ity, requiring information about the income of an individual, instead of evi
dence of having paid sufficient social insurance contributions.
As the value of the instrument rose to improve the poverty effectiveness of
the instrument over time, the impact was to increase the proportion of the
population covered by the means-tested instrument, thus increasing what is
known as the ‘unemployment trap’, whereby individuals are not better off in
work. To counter this, an in-work benefit, the Family Income Supplement
(FIS)—similar to instruments such as the EITC and Family Credit/WTC in
the US and the UK respectively—was introduced in 1984 (Figure 1.4). This
300
250
200
150
€ per week
100
50
0
0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60
–50
–100
–150 Hours per Week
T VAT SIC IT CB UA FIS Net Earns
Figure 1.3 Unemployment Trap from Means Testing

Introduction 9
300
250
200
150
€ per week
100
50
0
0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60
–50
–100
Figure 1.4 Poverty Trap
instrument was targeted at families working more than twenty hours per
week, with the objective of reducing the unemployment trap. It too was
means tested at the rate of 60 per ent, however it also extended means testing
higher up the income distribution. At the same time, reforms were made to
take low-income individuals out of the tax net, but with a relatively high,
marginal tax rate of 40 per cent.
This system of policies, all with relatively straightforward and reasonable
objectives, evolved over time. However combined, this system produced sig
nificant complexity and unintended interactions. Here, quite a significant
proportion of low-income families with children faced a withdrawal rate of
60 per cent of the FIS, combined with a marginal income-tax rate of 40 per
cent and a social-insurance contribution rate of about 8 per cent, combining
to produce a marginal effective tax rate of 108 per cent (Callan et al. 1995)
(Figure 1.5). This resulted in a ‘poverty trap’ where individuals have no
incentive to increase their working hours even if they wished to, as earning
an extra pound would result in their net income falling by eight pence.
Capturing the detail of actual legal rules, microsimulation models allow for
complex interactions between different policy instruments to be identified.
1.1.4 Behavioural Complexity
Since the 1980s, a significant amount of tax-benefit policy reform across

the OECD has targeted improved work incentives to counter some of the
problems identified above. However, microeconomic theory identifies
10 Introduction
300
250
200
150
€ per week
100
50
0
0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60
–50
–100
Figure 1.5 Reducing the Poverty Trap
complex competing forces resulting in what is known as a backward-

bending labour supply curve, as a result of the impact of a substitution
effect, whereby a reduction in the marginal return from labour will
increase the attractiveness of leisure, and an income effect incentivizing
an individual to work more. The net impact of these forces in terms of
labour supply depends upon the relative preferences of the individual,
which may be both idiosyncratic or a function of personal characteristics,
such as the presence of children, their gross wage rate, or age. In addition,
labour-demand constraints may result in labour-force outcomes that are
different to desired labour supply.
Combined, these sources of complexity can result in a ‘spaghetti’ of differ
ent issues. While it may be feasible to use pen-and-paper analytical methods
to analyse average or simplistic situations or sets of policies, it is often very
difficult or impossible to disentangle the impacts of more complex policies,
population groups, or behaviours. In such cases, it is often the unintended
consequences that cause the policy maker the greatest headaches, as the
recipients of these consequences are often those who will be most likely to
complain, resulting in negative media coverage and thus undermining the
political support for what may be generally worthy policy objectives. A
microsimulation model facilitates the ironing out of some of these difficul
ties in policy prior to implementation. Microsimulation allows for the exam
ination of drivers of behaviour using a static model, as in the case of
replacement rates (O’Donoghue 2011) or marginal effective tax rates
(Mertens and Montiel Olea 2018).
Introduction 11
1.1.5 Analytical Objectives
In the field of income maintenance policy, and the associated financing of

these policies, what are the dimensions of analysis in which policy makers
are interested?
Cost is often top of the priority list in designing a policy reform, albeit as a
constraint or indirect policy objective due to a limited budgetary envelope.
Targets associated with this objective include public finance indicators of
balance and sustainability. A model with this objective will in general have
the requirement of both (a) utilizing a dataset which is representative of the
population of concern to the policy and (b) modelling the policy in sufficient
detail to be able to undertake accurate costings.
As microsimulation models incorporate a micro-population, the distribu
tional impacts of a policy are another primary focus. Models may look at the
distributional impacts of a policy or policy change across different income
categories, either in the case of a vertical redistributive analysis or across dif
ferent family types in the case of horizontal redistribution. Estimations of the
impact of changes on low incomes, as in the case of a poverty analysis, are
commonplace. The capacity to estimate the numbers of potential winners
and losers as a result of a policy change is also very important, particularly to
politicians.
Policies often have a behavioural dimension. Strategies to reduce labour-
supply incentives associated with interactions of the tax-benefit system in
OECD countries are highlighted above (Aaberge and Colombino 2014).
There is a priority objective within policy reform in many developing coun
tries to add conditionality to other anti-poverty policy. For example, in the
Bolsa Familia programme in Brazil school attendance of children is a
requirement for eligibility for an anti-poverty instrument (Bourguignon
et al. 2003; Cury et al. 2016). It thus has multiple objectives, namely increas
ing education participation and reducing both child labour and poverty. In
order to model these analyses, an econometric behavioural model will be
required, or at a minimum, a capacity for scenario analysis.
Sometimes, the induced behaviour that is targeted relates to consumption.
This may include the achievement of minimum consumption baskets
(Capéau et al. 2014) or the reduction of consumption of goods with negative
consumption such as excessive fatty foods (Cappacci et al. 2012) or polluting
fuels (Labandeira and Labeaga 1999; Berry 2019). This type of model will
require a base dataset that contains consumption expenditures and an
econometric model of consumer behaviour.
12 Introduction
Poverty and social exclusion can be concentrated in particular places in

addition to being associated with particular socio-economic characteristics,
such as age, disability, or unemployment. Policy targets in this dimension
include the UK’s target of ‘tackling disadvantage by reviving the most
deprived neighbourhoods, reducing social exclusion, and supporting socie
ty’s most vulnerable groups’ (Tanton and Clarke 2014). In this case, the
microsimulation model will require spatial coordinates.
A related spatial dimension that is useful in policy development is policy
learning from developments in other countries. It is the basis of comparative
research which has become increasingly important, particularly as part of
the objectives of international organizations. The OECD Making Work Pay
programme focuses on cross- country comparisons of tax- benefit policy
(Pearson and Scarpetta 2000). Comparative research places challenging
demands on microsimulation models as datasets, and models in different
countries are not necessarily compatible and can require significant work to
be made comparable (Sutherland 2014).
Another dimension of relevance to policy development is time. Some pol
icies, such as pensions, are affected through the accumulated influence of
labour-market status and policy change over time. Given increasing life
expectancy, changes in fertility and mortality rates can have long-lasting
impacts. Thus, the impact of policy changes may be very slow to be visible,
while demographic changes that occur now can have influences a long time
into the future. Interacting with these forces are policy targets to improve
the sustainability of public pension systems and to reduce old-age poverty
(Li et al 2014).
1.2 Types of Microsimulation Models
In this section, the types of model considered throughout this book are
introduced.
1.2.1 Hypothetical Family Models
When governments publish their budgetary policy changes, it is often evi

dent the impact that these policy changes have on hypothetical families.
These are the simplest type of ‘microsimulation model’, as they abstract from
the complexity of the population or their behaviour to try to simulate the
impact of policy on hypothetical families. These models, described in
Types of Microsimulation Models 13
Hypothetical
Families
Model Framework
Tax-Benefit Routine
Analytical Routines
Figure 1.6 Hypothetical Model
Figure 1.6, typically therefore contain a simple database containing one or

more hypothetical families and generally use a stripped-down version of the
tax-benefit system.
As noted, the simplest type of microsimulation model is one that abstracts
from population complexity entirely, analysing the static impact of policy
and policy change on hypothetical families. Burlacu et al. (2014) describe the
main focus of these models which include:
• illustrative purposes
• validation
• cross-national comparisons
• replacement of insufficient or lack of micro-data
• communication with the public
Hypothetical family models have been applied to many fields, but the
dominant policy area is that of social security and taxation. Given their rela
tive simplicity, their geographic spread has been widespread, with the UK,
the US, Australia, and Ireland having the highest share of such models.
Methodologically, the chapter on hypothetical models focuses on a variety of
choices, including the unit and period of analysis, updating, and analytical
output measures, which are common to other types of model, as well as
modelling choices specific to hypothetical models, such as the unit of vari
ation by which heterogeneity is introduced to hypothetical models.
Due to their simplicity, they are very useful communication devices, as is
evident from their use in media reports. As a developer of models, they are
also specifically useful as validation models for testing components. The
more complex a model, the more difficult it is to validate, so running a simu
lation on a small set of families can help to identify any bugs. When data are
not available for a particular analysis, as in the case of some life-cycle
14 Introduction
analyses, hypothetical family models can be utilized for analysis (Rake

et al. 1999).
Lastly, because of their relative simplicity, hypothetical family models are
extensively used in international comparative analysis. Tax-benefit calcula
tions for stylized households have been widely used in international com
parisons of many different aspects of tax-benefit systems. Comparing the
situations of similar household types, they provide valuable information
about differences in national systems and illustrate some of the effects of
actual or hypothetical policy changes (Pearson and Scarpetta 2000).
There are, however, problems with this approach because it attempts to
reduce complex tax-benefit systems to single (or a few) point estimates.1 By
using ‘average household’ characteristics, the analysis is likely to miss many
of the important features of the tax-benefit system which, although not
applicable to the ‘average household’, may affect a significant part of the
population. The ‘stylized’ approach does, by definition, not take into account
the details of the structure of the population and is thus problematic if used
as a basis for summarizing the actual situation in a given country.
1.2.2 Static Tax-Benefit Microsimulation Models
A second dimension of complexity that is considered relates primarily to

population complexity (Di Nicola et al. 2015). These models are typically
defined as static models, focusing on the impact of policy change before
there is an opportunity for a behavioural reaction; i.e., the ‘day-after effect’.
Static tax-benefit microsimulation models are similar to the hypothetical
family models described above. The primary difference is that they incorpor
ate greater heterogeneity in the population database, typically via representa
tive samples of the population (Figure 1.7). Static microsimulation models
involve the interaction of population and policy complexity, but abstract
from behavioural response or other endogenous change in the model, and as
such they model the day-after effect of a policy change. Li et al. (2014) con
sider the uses and methodological choices of static models.
Like other types of microsimulation model, static tax-benefit models
examine in detail the policy system with the aim of understanding how pol
icy impacts at the individual and household level, thus modelling the inter
action of population and policy complexity. Given the complexity of tax and
1. See Immervoll and O’Donoghue (2009).

Database
Model Framework
Analytical Routines:
RR/METR Tax-Benefit Routine
Output Routine
Figure 1.7 Static Tax-Benefit Model

Note: RR (replacement rates); METR (marginal effective tax rates).
benefit policy legislation, these models, even ignoring behavioural responses,

can be highly complicated. Being representative of the population, they
require a full representation of the tax-benefit system. They are sometimes
known as arithmetical models (Redmond et al. 1998).
In terms of their policy focus, while historically tax and social-security
policy has been the main focus, there is an increasing importance of other
policy areas, particularly in relation to health and social care. The geograph
ical spread of these models has increased as the availability of micro-data has
increased. Given their relative policy complexity and availability of data,
static microsimulation models have proliferated in OECD countries, how
ever with improved data availability the field has expanded outside of OECD
countries in recent years (Joust and Rattenhuber 2018). In terms of analyt
ical scope, static models focus on distribution and redistribution incidence,
as well as on the drivers of behaviour, even if behaviour is not modelled
endogenously.
Simulating the fine detail of tax-benefit policy legislation, these static
models are thus in a position to evaluate existing tax-benefit policies and aid
in the design of new individual schemes or entire systems. They calculate
applicable amounts of each element of the tax-benefit system in the legal
order, so that interactions between different elements of the system are fully
taken into account. The resulting taxes, benefits, and income measures for
each individual, family, or household are weighted to provide results at the
population level. Such microsimulation models have been developed, and
are in use, in many OECD countries (Li et al. 2014).
By incorporating the interactions of different elements of the tax-benefit
system, and by taking full account of the diversity of characteristics in the
population, this approach allows a very detailed analysis of the revenue, the
distributional and incentive effects of individual policy instruments, and
the system as a whole. In particular, they provide a powerful means of
16 Introduction
performing ‘what if ’ analyses by allowing the analyst to manipulate all

relevant parameters of the system such as tax rates, thresholds, amounts,
and income concepts (see Redmond et al. 1998).
Static models do not, however, incorporate behaviour, treating simulations
as the first-
round, ‘next-day’ effects, before any behavioural response.
Bourguignon and Spadaro (2006) argue that these first-round effects are ‘a
good approximation of final welfare effect if changes are small enough and
individuals may be thought to operate in perfect markets’. However, when a
large behavioural response might be expected, results will be biased in rela
tion to the impact of a policy reform. Yet, even though such a ‘static’ simula
tion cannot measure the direct impact on behaviour of reforms, it can be
used to determine the pressures on behaviour (‘incentive effects’), such as
marginal tax rates and replacement rates (see Figure 1.7).
Bourguignon and Spadaro (2006) also highlight other sources of potential
inaccuracy in this approach, including the ignoring of the production side of
the economy, which may react to changes in tax-benefit policy. Furthermore,
static tax-benefit models generally assume that there is no tax evasion and
assume full benefit take-up.
1.2.3 Behavioural Models: Labour Supply
Many public policies have the objective of changing behaviour in addition to

financing or distributional objectives. Behavioural objectives include the
reduction of work disincentives and the reduction of pollution. It is unsur
prising, therefore, that part of the field of microsimulation has focused on
behavioural response.
Labour market behaviour in relation to labour supply is one of the most
important areas for behavioural analysis in the microsimulation field.
Aaberge and Colombino (2014) describe the development of the field of
labour-supply-focused microsimulation models and methodological choices.
There are three methodologies for modelling labour supply:
• the reduced form approach

• the structural ‘marginalist’ approach
• the random utility maximization approach
Figure 1.8 describes the structure of a labour-supply microsimulation model.

In many senses, there is an overlap with the static microsimulation model
outlined in Figure 1.7. A behavioural labour-supply model utilizes a static
Database
RR/METR
Model Framework
Output Routine
Tax-Benefit Routine
Labour Supply
Routine
Figure 1.8 Labour-Supply Behavioural Models
microsimulation model to simulate the budget constraint associated with

alternative choices. This is required for the econometric estimation of a
labour-supply utility function, which is then in turn used to model the
behavioural responses of policy changes that are simulated in the static part
of the model.
Labour supply is central not only to modelling behavioural responses, but
also to modelling optimal tax-benefit systems, with a focus on a computa
tional approach, given some of the challenges of the theoretical approach.
Combining labour-supply results with welfare functions enables the social
evaluation of policy simulations (Kleven et al. 2009).
1.2.4 Behavioural Models: Consumption Behaviour
While the modelling of policy measures that depend on current income

(such as direct taxation and social transfers) has been the focus of most of
the models described thus far, indirect taxation or taxation that is a function
of expenditure is also quite important. Capéau et al. (2014) review models
that depend on consumption and indirect tax. Indirect tax is one of the more
important sources of tax revenue in OECD countries and frequently the
most important in non-OECD countries, while there have been substantial
reforms in the past fifteen years.
Figure 1.9 defines the structure of consumption-based microsimulation
models. They are similar in structure to a labour-supply model, however the
base dataset and the policy model are different. The base data requires infor
mation about expenditures, while the policy algorithm incorporates indirect
taxation such as valued-added tax and excise duties. The behavioural module
incorporates an econometric model, based on a demand system, that allows
for the consumption response to price changes to be determined.
18 Introduction
Database
Model Framework
Tax-Benefit Routine Change in Welfare
Consumption
Behaviour
Figure 1.9 Consumption-Behaviour-Based Models
Given the choice between changing consumption or savings rates when

prices or taxes of goods change, behavioural assumptions or models (whether
behaviour is explicitly modelled or not) are intrinsic to all indirect-tax
models. Methodologically, most current indirect-tax models take the house
hold as the unit of analysis, with some extensions into firm-level units. There
are a variety of welfare analyses that are utilized in indirect-taxation model
ling, including the modelling of potential winners and losers, the progressiv
ity of a reform, and distributional analyses involving both direct- and
indirect-tax reform.
1.2.5 Environmental Models
The environment as a policy issue has increased dramatically over the past
four decades. Research in this area extends from global challenges, such as
climate change, access to water and soils, ozone emissions, and biodiversity
loss, to issues with a smaller geographical scope, such as water quality and
traffic congestion to the impact of the environment on health. Hynes and
O’Donoghue (2014) describe the use and development of environmental
microsimulation models.
The use of microsimulation modelling in the realm of the environment
overlaps with many traditional areas of such modelling, such as the distribu
tional incidence of public policies or the impact on behaviour in relation to
the incidence of these policies. Within the environmental and natural-
resource economics literature, the interaction between human activity and
the environment has also been shown to be strongly influenced by spatial
location. In this regard, the use of spatial microsimulation models has proven
Environmental Policy Model
Environmental Policy Database
Pollution Model Model Framework
IO Model
Tax-Benefit Routine Change in Pollution
Consumption
Behaviour
Figure 1.10 Environmental Models
a useful tool for modelling socio-economic environmental interactions and

policies.
Figure 1.10 describes the structure of a microsimulation model that is
used to simulate environmental fiscal policy such as carbon taxation. It is
similar in many respects to a consumption-based model. However, the price
changes that are modelled as part of the policy are different. In dealing with a
carbon tax, the initial price change depends upon the polluting equivalent of
the good consumed. So, for example, coal is more polluting than gas and so
would incur a higher carbon tax. The impact of a carbon tax can be both
direct and indirect. Households purchase fuels which produce carbon emis
sions, but also purchase other goods and services which themselves have
carbon inputs and so on. Incorporating both direct and indirect effects
requires an input-output model, which is in effect a map of flows between
different sectors in an economy and can be used to produce these direct and
indirect impacts of the price change resulting from a carbon tax. Once the
price change for household consumption at the detailed level is produced, a
simulation can be undertaken in the same way as a consumption-tax model.
However, in addition to revenue or budget impact, the impact of the policy
change on pollution outputs can also be modelled.
1.2.6 Decomposing Inequality
Given the capacity to model the incidence of policy on a population, micro

simulation models have been used to understand in greater detail the way in
20 Introduction
which policy impacts upon the income distribution. Bargain (2014) considers
the methodology used to decompose the drivers of the income distribution.
Traditionally, models have modelled inequality with and without particular
policies, or modelled the impact of an actual policy change.
Bargain highlights challenges in relation to the decomposability of
inequality and poverty indices and the decomposition of changes contem
poraneously into factor and income components. It considers a methodology
developed in recent years using microsimulation to construct counterfactual
situations and to disentangle the pure effect of a policy change from changes
in the environment in which the policy operates. The methodology decom
poses inequality change into policy, income growth, and other effects,
although linearity in tax-benefit systems sees the income-growth component
eliminated.
The methodology has been applied to study the effect of policy changes in
France and Ireland, policies implemented in the UK under the Labour gov
ernment of 1997–2001, and the effect of tax-benefit policies on non-welfarist
aggregated measures that value leisure in addition to disposable income. In
addition, the role of policy developments occurring during 2008–10, the first
‘dip’ in the Great Recession, in four European countries and over the long
term in the UK and the US, have also been examined using the methodology.
Increasing availability of data in developing countries has allowed for the
field to be extended beyond OECD countries over the past two decades.
Essama-Nssah (2014) consider microsimulation techniques commonly used
to assess variations in individual and social outcomes associated with the
process of development to try to explain distributional change by decompos
ing it into its various determining factors.
Figure 1.11 describes the structure of a model used for decomposing
inequality. It essentially compares two datasets, relating either to two separ
ate countries or two separate time periods. Income- generation models
(IGM) are estimated for both countries to describe the labour and capital
markets and to describe the distribution of market-income components of
both periods or countries. Tax-benefit models describe the generation of dis
posable income. IGMs are swapped to simulate the impact of alternative
market incomes and swap the tax-benefit systems, in order to simulate the
impact of alternative systems to get eight different combinations.
Alternatively, the IGM could be separated into market participation and
market income to give sixteen combinations. Inequality can be calculated for
each combination to describe the impact of individual components on the
distribution of disposable income.
Database1 Database2
Model Framework
Income Generation Income Generation Income Generation Income Generation

Model 1 Model 2 Model 1 Model 2
Tax- Tax- Tax- Tax- Tax- Tax- Tax- Tax-

Ben1 Ben2 Ben1 Ben2 Ben1 Ben2 Ben1 Ben2
Inequality
Decomposition
Figure 1.11 Decomposing-Inequality Model
1.2.7 Inter-Temporal Dimension: Dynamic

Microsimulation Models
Thus far, the focus has been on models that utilize datasets for a specific
point in time and a specific place. However, policies often have a temporal
dimension, as in the case of the accumulation of pension entitlement over
time, the impact of long-term demographic change, or location-specific pol
icy and behaviour, as in the case of urban renewal, rural development, or
migration behaviour.
Dynamic microsimulation models simulate inter-temporal transitions in
the population for use in policies that require this information, such as for
pensions and student loans, or to provide an inter- temporal analytical
dimension, such as life-cycle redistribution.
Li et al. (2014) describe the methodological choices faced by builders of
these models, and Figure 1.12 describes this structure. At the core of the
model lies a system of equations or behavioural routines that age the charac
teristics of a population (e.g., mortality, fertility, labour market, incomes,
tax-benefits, and family formation, etc.). In that way, the population is pro
jected forward though time at a micro-level. Some behavioural routines may,
in a similar way to labour-supply routines, react to policy changes in, for
example, retirement-choice decisions.
The main applications of dynamic microsimulation modelling are unsur
prisingly, given the life-cycle nature of pensions, life-course redistribution,
and inter-generational redistribution. However, the methodology is broad
ening to include health and spatial- and education-focused models.
22 Introduction
Output Routine
Model Framework
Database RR/METR
Behavioural
Routine
If Behaviour depends
on Tax-Benefit System
Tax-Benefit Routine
Figure 1.12 Dynamic Microsimulation Models
Most models are aligned, closed cross-section models focused using dis
crete time. In relation to the last choice, about one-third of the models
incorporate endogenous behaviour, incorporating this dimension of com
plexity discussed in the previous sub-section.
1.2.8 Spatial Microsimulation Models
Location also adds a dimension of complexity over which the population

varies, such as with different labour markets, on which policy can vary as in
the case of localized development policy, where distance may have an effect
in terms of commuting behaviour, or where behaviour may vary, with spatial
clustering of preferences (Tanton and Clarke 2014).
One of the main methodologies used in the field relates to spatial micro-
data generation. Typically, there are data gaps in relation to data that are both
representative at the unit of analysis, such as the individual or household,
and also representative at the spatial scale. Data that are rich in terms of indi
vidual contextual information may have poor locational information, or due
to sample size may not be representative at a fine spatial resolution. On the
other hand, data that have a fine spatial resolution may have limited context
ual information. Occasionally, as in the case of administrative data in the
Nordic countries, both may coincide.
Figure 1.13 describes the structure of a spatial microsimulation model.
The model takes nationally representative micro-data from, say, a household
budget survey, and reweights or re-samples the data to be consistent with
small-area census data. Geographic information systems can be utilized to
link other spatial data, such as physical information, e.g., roads or rivers.
Many studies then merely undertake descriptive analyses of the combined
Overview 23
Small Area Census Spatial Data

(Roads, Rivers, Land Use)
HBS (Income &

Expenditure)
Model Framework Change in Spatial

Spatial Behaviour:
Characteristics of Commuting,
Population/policy Policy/Analytical Congestion,
Reform Routine Migration, Land Use
Behavioural
Response
Figure 1.13 Spatial Microsimulation Models
data, while it is also possible to incorporate behavioural responses, such as

changes in commuting, congestion, land use, or migration behaviour as a
result of policy changes, e.g., road construction.
Model applications are divided up into the simulation of the spatial inci
dence of socio-economic phenomena, such as income and poverty, crime,
housing stress, obesity, water demand, smoking rates, well-being, trust, and
disability on the one hand, and policy reform on the other. Spatial models
are sometimes linked to other models, such as static tax-benefit microsimu
lation models, CGE models, location-allocation models, and to spatial inter
action models. Spatial microsimulation models can also be used for
projections.
1.3 Overview
This section presents an overview of the topics that will be covered in the
book. The focus of the book relates to the practical development of micro
simulation models, highlighting in turn policy context, issues associated
with the preparation of data used in the model, issues associated with valid
ation, and how to measure outcomes generated in the model, with each
chapter containing a specific policy simulation.
The primary policy focus of the book is on using microsimulation model
ling for policy-related inequality analysis. Drawing upon the complexity
analogy, the book concentrates initially on social-protection policy for hypo
thetical families, abstracting from most aspects of complexity, thus focusing
24 Introduction
solely on policy complexity. Population complexity is then added when

reflecting on tax policy and redistribution.
Behavioural complexity is next introduced, when considering labour-
supply responses to tax-benefit policy change. Behavioural impacts of policy
are also considered when analysing the impact of indirect taxation and
environmental taxation.
In the final chapters, an IGM is introduced to describe the distributional
structure of market income, when decomposing the inequality impact of an
economic crisis, introducing temporal complexity into the dynamic micro
simulation analysis of pension policy. Spatial complexity is also introduced
when using a spatial microsimulation framework to analyse spatial
inequality.
The early chapters of the book utilize a relatively simple Microsoft EXCEL-
based model, XLSIM, which is a modelling framework developed for use as a
teaching tool to help students quickly build their own models. In later chap
ters, bespoke models developed in Stata are utilized to undertake
microsimulation.
Researchers interested in developing expertise in the field may wish to
participate in the International Microsimulation Association and read art
icles from the International Journal of Microsimulation. The Association
holds bi-annual world congresses, with regional meetings in different parts
of the globe in intervening years.
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CHAPTER III
SEYYID ’ALÍ’S STORY OF HIS REDEMPTION
On leaving the talisman-monger’s we went about our shopping in the
Meccan bazaars, my guide pointing out to me the places of interest
on the way. He grew excited when we passed a certain coffee-
house, from within whose doors, as he assured me, he had escaped
from himself into the bosom of the Beloved more times than he could
count. “There are better ways of ascending into heaven, yá-Moulai,”
he exclaimed, ecstatically, “than by being buried underground!” He
paused as if to give me the opportunity of begging him to explain the
connection; but all I said in reply was that a Tower of Silence would
scarcely suit one whose tongue was for ever on the wag.
“’Tis true,” he affirmed, in no way disconcerted, “the birds of prey are
not to my liking. I would discourse of the parrot of mysteries, that
hath opened to me the gates of Paradise more than once. If your
Excellency would acquaint himself with——” I interrupted him,
saying: “Are you speaking of hashísh, my friend? If you are, let me
tell you that I have no wish to renew my experience of the drug.” And
when I hurried on, he drew a deep breath, but whether of
disappointment or of relief I couldn’t make out. “In that coffee-house,
yá-Moulai,” he said at last, “you might have tasted of every narcotic
of the drowsy East: of hashísh, the master Seyyid, or the Parrot of
Mysteries, an acquired taste; of bang, a most potent liberator of
thought; and, lastly, of opium, which is, as we Persians have it, the
Antidote, the healer of every ill except the one it engenders. I was
once a well-seasoned vafurí (opium-smoker), and could discourse of
mysteries more eloquently than any dervish. My nose would grow
wet every time I smoked a pipe of hashísh and my imagination bear
me on its wings to the seventh heaven, or plunge me into the lowest
hell. Those were days of spiritual intoxication—yá-Allah. What cured
me of drug-bibbing was the dread of remaining in the abode of the
damned.”
He sauntered on, telling over the beads of his rosary. “Never,” he
cried suddenly, “shall I forget the last pipe of hashísh I smoked.” I
followed him up on the scent of a story. “Come,” said I, “tell me your
tale, and have done with it.”
“Well, it was at Shíráz; I was in the society of some twenty matured
dervishes, and the year was at the spring and the sun was set. I
never hear a nightingale, nor smell a rose, but I can taste that kalyan
of hashísh and tobacco. Not that I was conscious at the time of any
stomachic qualm. Not more than half-a-dozen whiffs were enough to
speed me on my way into a world in which this mortal flesh lay
shuddering at the terrible aspect of things—terrible beyond the
imagination of the unenlightened to conceive. Supper was brought
in. Among the dishes laid before me was a plate of piláw, dome-
shaped, having on top a multitude of round pieces of meat, and
these, to my exceeding terror, came tumbling down the pyramid of
white rice, owing to the carelessness of the servant in handling the
dish. But what did I, in my excited fancy, behold, yá-Moulai? I
thought I was at the foot of a snow-clad mountain, whose crest
dwarfed that of Demavend, and from the summit thereof there came
hurtling down on me huge boulders of massy rock. I cried aloud in
terror, and tried to hide myself in the corner of the room. My friends,
the dervishes, laid hold of me, and carried me into the compound,
and flung me into the tank, and in so doing they cheated me to
believe that a host of angels had rescued me from the avalanche,
and, bearing me into Paradise, had cast me into the living waters of
Salsabíl. For, on opening my eyes, I saw a heavenly houri, whose
face shone as the face of the sun. Her feet were on the earth, but
her head reached as high as the fourth heaven. How could I—a man
of ordinary stature—make love to a houri whose height, even among
the ladies of Paradise, must have been a swallow’s flight above the
average? True, I might sit in adoration at her feet, but that a taller
man than I would have the pleasure of kissing her lips seemed only
too likely. This thought was blasphemy in itself; and no sooner did it
creep into this unregenerate mind of mine than two angels caught
me by the hands and threw me into the burning furnace of hell. And
this sudden change in my fortunes corresponded with the actions of
my friends in taking me out of the tank and putting me to bed, and
applying a hot remedy to what they believed to be a cold disease.
Yá-Allah, how I burned, but without consuming, in that fire of the
unredeemed. I cried for help, but Allah—may I be His sacrifice—cast
me still deeper into the hell of His displeasure, saying, ‘He who
would worship me must worship me in soberness and sincerity!
Eschew all narcotics, O Seyyid ’Alí, lest I leave thee here to perish in
the flames.’ Then repentance wrung my heart so that the tears
started to my eyes and overflowed. And when that happened a wind
from heaven blew, and I caught sight of a cloud of sun-lit hair—the
hair of the divine houri who had previously overawed me—and these
radiant tresses were wafted by the wind within arms’ reach of my
despair. I clutched them in these two hands. The exhilaration of a
swift ascent filled my soul with thanksgiving, and a shriek—like a
throb of pain—darted through me from without, striking on the drum
of consciousness within me. In other words, I awoke to find myself
lying at home, with a handful of my wife’s hair pressed to my lips in
rapture. How I came to be there I never discovered, but the mother
of my children explained to me with many words that the too forcible
removal of the hair I held in my fingers had left a bald patch on the
crown of her head. And this, yá-Moulai, is the true story of my
redemption.”
Meanwhile, we had reached the northern extremity of Mussah-street,
where in a shop I noticed a number of small bags of yellow leather
containing, as Seyyid ’Alí informed me, the celebrated henna of
Wady Fatima. This valley, called after the Prophet’s daughter, the
wife of ’Alí, his cousin, is situated about eight hours’ journey to the
north-west of Mecca, on the road to Medina. The whole
neighbourhood abounds in the shrub from whose pounded leaves
the henna paste is produced. The act of dyeing the hair with henna
is known by the name of khezab, and is so popular among the
Muhammadans of both sexes that it has come to be almost a
religious rite. Many a devout dyes his hands and feet and hair once a
week, the paste giving to the skin an orange-reddish colour, and
deepening the original shade of dark hair to a ruddy black. On the
hammám day the henna is taken to the bath; the attendant forms it
into a paste in small dishes used for the purpose and called jamé-
henna; the decoction should be allowed to stand for half an hour
before it is applied to the skin and the hair. There are special women
artists who draw, on the soles of the feet and the palms of the hands,
all manner of pictures with this dye. Not less than eight hours are
devoted to the practice, the victims—women, of course—lying with
outstretched limbs, for the henna “to take its colour.”
If one neglects to make use of the dye one runs the risk of bringing
misfortune and leprosy on one’s whole family. The henna of Wady
Fatima, which has a perfume peculiar to itself, is considered
particularly blessed. I was told by the shopkeeper—a prejudiced
person, no doubt—that the Devil himself could be rendered harmless
to the Muslim who should dye his hands once a week and employ an
apt quotation from the Kurán, always provided he were not clad in
ihrám. The assurance that he had sold one hundred thousand bags
of the precious dye to the pilgrims within the month gave me a lively
notion of the credulity of his customers.
Next day I had an opportunity of witnessing the funeral of one of the
chief priests of Mecca, who had died of cholera. The procession,
despite the panic created by the epidemic, was of considerable
length. Half a dozen mullás, intoning passages of the perspicuous
Book, led the way. These were followed by twelve unkempt
dervishes in quaint uniforms, reciting in unison the praises of the
dead priest. Then came the rough bier peculiar to Mecca on the
shoulders of ten pilgrims of as many nationalities. The son,
supported by two stalwart priests, and the chief mourners came next,
and after them the women, about twenty in number, and a crowd of
beggars, who had heard that the flesh of two camels was to be
distributed among them. Every now and then, as we noticed on
watching the procession pass by, the bearers would be relieved of
their burden by the most eager among the bystanders, for it is a
tradition that seventy thousand angels will praise the man who lends
a helping hand in carrying the dead to the cemetery. A frequent cry
went up of “O Lord, may his sins be forgiven him. Praise be with
Muhammad and with his people.”
“Yá-Moulai,” said Seyyid ’Alí, “you saw how the people lent their
assistance in order to win the approval of the angels? Well, I will tell
you of a clever trick performed in Mecca last year by four Sunnis
who had murdered a Shiah in a lodging-house. One of the assassins
was chosen by the arbitrament of the estakhhareh to buy the bier
and to bring it to the house where the body lay. That being done, the
mutilated corpse was laid inside by the four men, who, so to speak,
bore the burden of their misdeed into the street. The passers-by,
seeing a funeral, hastened to offer their help in carrying the corpse to
its resting-place. No sooner was each one of the assassins relieved
than he made good his escape, so that by the time the washing-
house was reached the culprits had all disappeared. The crime was
detected when the body was taken out to be washed. Suspicion fell
on the bearers—half a dozen strange pilgrims who had lent a willing
shoulder—and they were brought before the Kazi on the charge of
murder. They only escaped death by paying a heavy sum in blood
money.”
We pursued our course eastward to the temporary Syrian bazaar
called Sughé-Shami. Goods from all parts of Syria—from the town of
Smyrna to the remotest fastness of Lebanon—were to be found
there. The Syrians drove a lively trade in silk stuffs from Damascus
and Aleppo, as well as in European cotton prints and in steel ware.
The steel ware was sold as “Inglisi,” though it was generally of
German manufacture, imported into Asia Minor either direct from the
Fatherland or from Constantinople. I saw “Inglisi” silk umbrellas, with
what appeared to be silver handles, priced at half a mejidi, or about
two shillings. German watches, guaranteed to be “Inglisi,” could be
bought at a cost varying from four to ten shillings. On the other hand,
Persian carpets were far more expensive there than they are in
London, and so also were Turkish ones. Silk headgear called chepi
and silk kerchiefs called kefi were in great request among the
Bedouins, who purchased, besides, the dried fruits of Syria. There
were many coffee-houses à la turque, where story-tellers recited in
flowery language, either Arabic or Turkish, the tales of the Arabian
Nights. Some pilgrims might sit listening from sunrise to sunset, but
my guide and I, having drunk a cup of coffee, proceeded on our way,
past the Prophet’s birthplace, to the Moamil or pottery bazaar. There,
as I watched the potters at work, I couldn’t help quoting the immortal
lines of Omar Khayyám, as translated by Fitzgerald:
“For I remember stopping by the way
To watch a potter thumping his wet clay;
And with its all-obliterated Tongue
It murmur’d—‘Gently, Brother, gently, pray.’”
Thence, in the Sughé-Lail, the carpenters have their niches. My

guide told me a story of a Meccan carpenter who went once to
measure a doorway of one of the houses in the neighbourhood.
Having forgotten his yard measure he calculated the width by
opening his arms. Then, still keeping his arms in the same position,
he hastened back to his shop. On the way he fell down a well; the
people gathered round; and one among them threw him a rope, but
the carpenter refused to catch hold of it, lest he might change the
measurement of the doorway. “Ah, my friend,” said I, “there I waited
for you. That story is taken from ‘Mullá Nasiru’-Din,’ a book satirising
the mock piety and the folly of the priests. You must be more careful
in choosing the tales you would foist on my credulity.” And so
wrangling we reach the cattle market.
Now, kindness to animals is specially recommended by Muhammad,
but his followers have still much to learn in practice. The sheep and
cattle are driven to the market in the early morning, before sunrise,
and, unless they are sold, must remain all day long without anything
to eat or to drink. The condition of some of the sheep was pitiful. The
camels, that are not accustomed to be for ever nibbling like the
sheep, appeared to suffer less from the deprivation of food. In that
quarter of the town nearly all the tradesmen, whether cattle-sellers,
butchers, fruiterers, or grocers, were Bedouins, dwelling in their
encampments inside the town, and holding themselves aloof from
the Arab townsmen and the foreigners. In manners, customs, and
morality they have suffered but little change from the time of the
Prophet, for, unlike the Meccans themselves, they have borrowed
none of the characteristics of their co-religionists from alien
countries. They forbid their women to be on intimate terms with the
townswomen; and when you meet them buying and selling in the
market place they are always extremely reserved, and sometimes
not less haughty in their demeanour towards you. For the frankness
which is their most pleasing quality in their canvas cities is held in
restraint so soon as they take up their quarters in Mecca during the
pilgrimage. The women, both rich and poor, work hard, in most
cases even harder than the men, and that is why they wear, in
contrast to the townswomen, who are corpulent and comely, an
appearance of being as muscular as they are lean and sun-baked.
Near the cattle market we saw some low shops and warehouses in
which corn and provisions were being sold by Indians and Egyptians
to some Bedouins who had entered the town in order to replenish
their supplies, and there, too, the out-going caravans are wont to
take in their eatables for the homeward journey. Rice and wheat are
the commodities which are most needed by the Bedouins of Hejaz,
and in these the southern Indians carry on a brisk trade with the
interior of that barren province.
CHAPTER IV
HEALING BY FAITH
Two things play an important part in the family life of Persia. The first
of these, the yearly almanac or taghvím is studied with a pathetic
trust by all. In a day that has been marked unlucky they see the
frustration of their hopes and prayers, however perseveringly they
may strive, by earnest effort, to elude the working of the fateful stars
and to bring about the consummation of their wishes. “The most
blessed hour for prayer,” I was told by one of them, “is when the
planet Jupiter is in conjunction with the culminating point of the
firmament.” And when I began to argue with him, he said in
astonishment: “Have you no faith in estakhhareh either?” I replied: “If
you can prove to me by any passage in the Kurán that God will lend
his advice to the Muslim who shall consult Him through the beads of
a rosary, I will believe in the taghvím, the estakhhareh, or any fáll or
omen you care to mention. But, first, let me be sure that I understand
the method of making an estakhhareh. Having read a verse of the
Holy Scriptures, you place the finger on a bead, then, counting the
beads from that point to the nearer end of the thread, you believe
that God will grant you your heart’s desire provided the number be
odd, but that He will refuse your request if it be even. Am I right?”
“Certainly,” he replied; “for if my prayer be reasonable and I
deserving in the sight of God, He will assuredly guide my hand.” “It is
obvious,” I retorted, “that God can and does guide His slaves; but I
deny that He shares your belief in the luck of odd numbers. Let the
Prophet be my intercessor. This is what he says:
“‘Do ye acquire knowledge, for he who acquireth knowledge in God’s
service performeth an act of piety; he who giveth utterance to it
praiseth the Lord; he who is diligent in search of it worshipeth God;
and he who imparteth it offereth sacrifice to Him.’ Now, your faith is
rooted not in knowledge, but in superstition. Look around you, and
you will see the wonders of God in the working of laws immutably
just, eternally the same. I tell you that action and reaction are equal
and opposite, that the ordered weal and woe are the results of our
own actions good and evil, and I advise you to put on the armour of
knowledge in the desert less you fall a victim to the superstitious of
whom you now are one. ‘The ink of the scholar,’ the Prophet tells us,
‘is more holy than the blood of the martyr.’”
My opponent, however, remained unconvinced. He assured me that
his spiritual director would not dream of wearing a new ’abá without
first consulting the taghvím, nor would he take it on himself to
administer a dose of medicine to a sick child without asking God,
through the beads of his rosary or the pages of the Kurán, whether
the remedy would be efficacious or not. Of the progress of medical
science the Shi’ah pilgrims knew nothing.
A PERSIAN PROFESSOR OF THEOLOGY.
Galen and Avicenna are still regarded as the leading masters of the
profession, and their treatises are the only ones that are studied.
Diseases are divided into hot and cold. A cold remedy is applied to a
hot disease, and a hot remedy to a cold one. The doctors bleed
patients suffering from malarial fever. They keep small-pox endemic
by their curious remedies. Silver armlets containing texts out of the
Kurán are worn as preservatives of health. The saints and
estakhharehs are sometimes the only doctors. “The One who sends
fever takes it away ... Khodá rahím ast (God is merciful).... If He
wants me to remain here He will cure me.... He is the best doctor.”
Offerings in money or in sweet-meats are given to the poor for the
patient’s recovery. The money is placed under the pillow every night,
and is distributed every morning among the needy. The patient,
despite the stifling atmosphere, is persuaded to believe in a speedy
recovery, everybody telling him that he will soon be quite kushdell or
cheerful. But when the end draws near a priest is summoned in
haste, and the dying man, if he has no just cause of complaint
against a child or against his wife, says not a word as to the
distribution of his property, having full confidence that the divine law
will be religiously followed. He instructs the priest as to the rites to be
observed at his funeral and the offerings to be paid for the peace of
his soul. He may command his sons to obey their mother and to
respect their sisters. If he has no issue he may settle his property on
a school, a mosque, a saint, or a water cistern.
The corpse must not remain more than twenty-four hours in the
house. The hammámí, or bath-keeper, now enters the house in the
capacity of an undertaker. He places the body on a korsi, that is, on
a raised wooden platform in the middle of the room; a copy of the
Kurán and a decanter of rose-water are set down near the head; and
a cashmere shawl is laid over the remains. For a month or forty days
after burial a ghari or hired priest keeps watch over the grave,
praying for the soul’s peace of the newly-departed, and reading the
Kurán aloud. On the night of the interment the percussion of the
grave, the fesharé-ghabre, is supposed to take place. The priest
must keep on reciting a certain passage of the Kurán, called Ayatu’l-
Kúrsí or the Verse of the Throne, in order to extend the space and
prevent the pressure. Then come Monker and Nakír—those livid-
faced angels of death—and question the deceased concerning his
faith. If his answers be satisfactory, ’Alí will cause him to be
refreshed by the air of Paradise; if not, he will be beaten on the
temples with iron maces.
The evening before I left Mecca for Jiddah I was suffering from a
racking headache, and my friends advised me to consult a certain
Arab physician. The curiosity to have an interview with this leech
overcame my scepticism concerning his health-giving touch, so off I
went to the east of the town where he dwelt, taking my guide with
me; and there, in a winding lane some three feet wide, we found his
house. My guide summoned the servant by banging at the outer
door with his club. In about ten minutes what we judged to be a small
urchin appeared behind the door and asked us in a piping treble
what we wanted. Having assured himself that we were not Bedouin
Arabs bent on pillaging the sacred house, he drew back the bars,
bidding us enter in the name of God the Merciful and Clement.
The courtyard through which we passed was unpaved and not more
than five yards square. The apartments—six fetid cells—ranged
round three sides of it. The hakím’s room faced the door. We walked
in with the greeting “Salám ’aleykum! Peace be unto you!” The faith-
healer was seated cross-legged on a mat in a corner of the cell. He
rose to receive us, saying “Bismillah! in the name of God!” the
Eastern equivalent of “Please come in.” He was of middle height,
lean, of a pleasing countenance; his eyes were deep-set, brilliant,
smiling; his beard measured the span of a man’s hand; and his teeth
flashed between lips framed for laughter. He wore a white
handkerchief round his head, and a long blue gown reached to his
ankles. Nothing could exceed the courtesy of our host. As a mark of
respect, he insisted on my taking his place; my guide, heaving a “Yá-
Allah!” and a sigh of relief, sank to my side on the left; while the
sunny-faced saint, squatting at my right hand, turned a beaming eye
on his trusty henchboy, who was standing in the doorway, waiting for
the orders of his lord and master.
In the East they never break the ice of silence with a remark on the
weather. The customary opening is to inquire if you are in health. I
told the doctor, in answer to his question, that I had a bad headache,
and had come to him to be cured. When he had raised his hands
and cried out “Yá-Muhammad!” thereby invoking the Prophet to lend
him the assistance he required, it was to ask me on which side the
head ached. I touched the spot, whereon he fell to rubbing it
vigorously with the palm of his right hand, calling out the while to the
urchin to fetch the necessary apparatus for the forthcoming
operation. The boy disappeared. In a few minutes he came back,
bearing in both his hands a round hollow plate of clay in which were
a few lumps of burning charcoal.
The next things he brought in were a couple of round iron rods about
twice the length of an ordinary pencil, together with a cup filled with a
black fluid used as ink and composed, if I mistake not, of a mixture of
starch and the soot of an oil lamp. The doctor thrust the rods in the
glowing charcoal. The fear of being branded bathed my brow in
sweat. The doctor, assuring me that I had no cause to be afraid,
cried out: “If we lose heart at the sight of these little rods, how much
the more shall we suffer when we feel the weight of the maces of the
angels of punishment. May God protect you from the fire of hell!”
The tips of the rods by this time were red-hot. Having dipped them in
the cup of ink, he closed his eyes, and then raised his voice in an
incantation that lasted several minutes. Not a single word could I
understand. When it was over he opened his eyes, and, saying the
word “Bismillah,” proceeded to draw with one of the rods on my right
temple five perpendicular lines crossed by five horizontal ones, thus
forming sixteen tiny squares. The same pattern was traced on the
left temple with the second rod. Several magic hieroglyphics besides
were inscribed in the same manner behind my ears and on the nape
of my neck.
After every operation the good doctor would pause to ask me: “Is the
pain gone now?” Four times did I tell him the truth; then, fearing that
he would begin to tattoo my body, I assured the persevering little
man that I never felt better in my life. His joy knew no bounds.
Raising his hands to heaven, he cried, “Praise be to God Almighty,
who hath sent to this poor family a power so miraculous. The secret
was bequeathed to my father by the Lord God, and when my father
died he left it to me as an inheritance. On no account must you wash
off the signs until to-morrow morning; for if you do the pain will return
to punish you. The blight of the Evil Eye was the cause of your
headache. Go in peace. You are welcome.”
The following day I set out on my homeward journey, taking Seyyid
’Alí with me as far as Jiddah; and when I said good-bye to him I felt
that I was losing an entertaining companion. That the reader may
experience the same feeling of loss in parting from me is my dearest
hope on bidding him farewell.
AN ARAB SHEYKH OF THE TOWN.
APPENDIX
By WILFRID SPARROY
SOME REFLECTIONS ON THE EXISTENCE OF A SLAVE
MARKET IN MECCA
I brought the notes of “Hájí Ráz” to a conclusion in the last chapter;
and he himself has bidden the reader farewell. It now remains for me
to say a few words on what I conceive to be the greatest weakness
in the Mussulman faith as interpreted by the Mullahs; and in so doing
I wish it to be understood, particularly by my Eastern readers, that I
am solely responsible for the opinions I am about to express on the
subject of the Mussulman’s attitude to slavery, the existence of
which, in the fourteenth century of the Hegira, must be a source of
some misgiving on the part of those who sympathise with so much in
the Muslim creed. And I appeal throughout to the enlightened laymen
of our Indian Empire, on whose interpretations of the Prophet’s
message the welfare of Islám will, in the future, depend in an ever-
increasing degree.
Now, the British are the champions of freedom: under their flag every
man is born free. Nothing is more hateful, to their way of thinking,
than that one human being should be the slave of another. In their
opinion the quality of slavery is to brutalise both the slave and his
master—the slave by depriving him of the self-respect which is the
heritage of every man who is free to choose his own career and to
rule, within the limits of humanity, his own destiny; and the master,
by making him the owner of a human soul—a responsibility so awful
that it is far more likely to lower him to the level of a beast than it is to
raise him to the height of a god. If this, in brief, be a fair statement of
the British attitude towards slavery, it will be interesting and, in a
measure, enlightening to the reader to follow, by way of contrast, the
argument supported by the ordinary Mussulman.
To be frank, the present-day followers of the Prophet—those who
have not been brought under the influence of European civilisation—
have far less sympathy with the opinions expressed in the opening
paragraph, than had Muhammad himself. Humanly speaking, the
British crusade against slavery is not only beyond their
comprehension—it is also above it. Their outlook on life, with its
rights, its limitations, and its responsibilities, differs fundamentally
from that of the followers of the Founder of Christianity. The
Christian, who speaks of himself as “a child of God and an inheritor
of the Kingdom of Heaven,” believes, if we misinterpret him not, that
the first step is with him, and the road with God. In other words, he
holds the inspiriting belief, which is, indeed, the source of all his
worldly progress and his prosperity, that God has given him the right
to act of his own initiative, but not the power—or only a
circumscribed power—to foresee whither his actions will lead him.
Therefore, in calling himself “a child of God,” he has chosen the title
that would best express his independence and his limitations. The
Muhammadan, on the other hand, cannot admit that he has the
power to move of his own free will, much less the right to do so. He
holds that every true Muslim is, and must be, “the slave of God,” the
theory of free-will being to the Muslim trend of thought so
antagonistic that it has come to bear much the same meaning as
lawlessness. Hence his aversion from Europe and all its ways.
“How,” he asks, “can morality and law flourish in a continent, in which
thought is free, in which women are free, in which God’s will is
superseded by the will of man? Freedom? I say we are all the slaves
of God, even when we are the slaves of other men. There is not one
creature who is free to act. Only the Creator is free. It is our
predestined lot to be submissive to His will.”
I hope the reader is following the thread of my argument. It is the
feeling of the East which I would attempt to lay bare. The existence
of slavery in these days is the natural outcome of that feeling. Many
a child is kept illiterate for no other reason than because its father is
illiterate. If the father is a pea-parcher or a bean-roaster, the son
must be a pea-parcher or a bean-roaster; for a son is nothing more
than a child of its father. This thraldom, to a lad of originality and
spirit, is unbearable, but he must either endure it, or else run the risk
of being an outcast. Thus the son is the slave of his father. In his turn
the father is under the bondage of his spiritual director, who too often
serves no other God than Mammon. The tendency of the Muslim,
however, is to accept the guidance of his “master” with
unquestioning humility. All might go well with him if his “master”—we
mean his priest—were always a man to be trusted, and the right man
to lead. Unfortunately the Muslim priest more often than not is more
unenlightened, more selfish, more avaricious, more unscrupulous
than most of his flock, and thus there is a danger of his enslaving the
whole fold. Poor sheep, they, believing him to be the shepherd of
God, are accustomed to follow him whithersoever he may ensnare
them. They are doomed to perish together on the rock of
Predestination, unless these “masters” can be brought to revise the
interpretation they have put on their Prophet’s teaching. Muhammad,
as a matter of fact, was careful not to draw a too narrow line
between the scope and the limitations of the human will. There is
nothing in his message which need deter a progressive Muslim from
accepting the belief that the first step is with him always, and there is
no doubt that the acceptance of such a belief by the whole Muslim
world would go far to breathe new life into the body politic. For it
would give to the imagination an ever-widening vision of human
responsibility, of human knowledge, and of human destiny. It would
emancipate every race that is proud to pay allegiance to the Prophet,
and would make slavery, in its widest as well as in its literal sense, a
curse of the unredeemed past.
“We know,” says Mr. J. H. Shorthouse, speaking in the words of an
oracular voice, addressing the King of Diamonds in a pack of cards,
“that we possess a power by which the fall of the cards is
systematised and controlled. To a higher intelligence than ours,
doubtless, combinations which seem to us inscrutable are as easily
analysed and controlled. In proportion as intellect advances we know
this to be the case, and these two would seem to run side by side
into the infinite—law, and intellect, which perceives law, until we
arrive at the insoluble problem whether law is the result of intellect or
intellect of law.”
Now, the Mussulman, in trying to solve this problem, seems to me to
have chosen the solution which is more likely than not to paralyse
the intellect and clog the wheels of progress. For if he is oppressed
or poor or ignorant or unhappy, he may say it is God’s will that he
should be so; and thus he may remain stationary, making no effort to
keep abreast with the march of civilisation. In other words, he may
come to be a slave to his god. And so, to make an end of this
preamble, it is not surprising that in countries where most men are to
some extent slaves, socially and politically speaking, there should be
men and women who belong, as purchasable and saleable chattels,
to such families as can afford to buy them. But—and this is an all-
important point—the Prophet wrought his manly utmost to mitigate
the ill-effects of slavery: it flourished exceedingly, as every schoolboy
knows, long before his time, and in other countries besides his own;
but, thanks to Muhammad’s laws, the lot of the slaves of Islám was,
and is still, immensely happier than was ever that of the slaves of
pagan Rome or of Christian North America. It is related that Abdullah
Ansari went one day to visit the Prophet, and received from him the
following instructions; “On this the last Friday of Ramazán, you must
devote yourself ‘to taking leave’ of the month, and to redeeming as
many slaves as you can: and these things you must do in order that
God may be gracious unto you.” The “leave-taking,” be it known to
the reader, is practised every year, but the old custom of setting
one’s slaves free on the last day of the congregation of the Muslim
Lent has completely died out. However, though it was not possible
for Muhammad to abolish slavery in a lifetime, the system being far
too deeply rooted in the customs of the country, he fully realised the
oppression to which the slaves had been subjected, and left nothing
undone which would ameliorate their fate.
Thus, in Súra xxiv. of the Kurán, entitled “Light,” it is written: “And
unto such of your slaves as desire a written instrument allowing them
to redeem themselves on the payment of a certain sum, write one, if
ye know good in them: that is, if ye have found them faithful, and
have reason to believe they will fulfil their engagement; and give
them likewise of the riches of God which He hath given you, either
by bestowing on them of your own substance or by abating them a
part of their ransom.” Some commentators believe the last
admonition to be addressed not only to the masters but to Muslims in
general, making it an obligation on them all to assist those who have
obtained their liberty and paid their ransom, either by giving the
ransomed slaves of their own stock, or by admitting them to have a

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Practical Microsimulation Modelling

(Practical Econometrics) O'Donoghue

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Practical Microsimulation Modelling

Practical econometrics is a series of books designed to provide accessible and

Books published in this series

An Introduction to State Space Time Series Analysis

Econometric Methods for Labour Economics

A Practical Guide to Price Index and Hedonic Techniques

Practical Microsimulation Modelling

Dedicated to my peers and students in the microsimulation community

• SWITCH–the tax-­benefit microsimulation model of the Economic and

Figure 0.1 describes my knowledge-­tree equivalent to a genealogical tree

1960’s Orcutt 1961

1970’s DYNASIM I/II

Figure 0.1 Model Knowledge Tree

These models span many of the main methodological areas of micro-

1 German Institute for Economic Research.

and powerful (Sutherland and Figari 2013). Extensions of EUROMOD

• codified knowledge, where specific knowledge is written down

• documentation that aims to facilitate other team members utilizing

List of Figures xvii

PART II. STATIC MODELS

xiv Table of Contents

PART III. BEHAVIOURAL MODELS

PART IV. DYNAMIC AND SPATIAL MODELS

10. Spatial Inequality 239

0.1 Model Knowledge Tree vii

xviii List of Figures

4.6 Lorenz and Concentration Curves 109

2.1 Microsimulation Functionality of Different Software Tools 33

7.9 Percentage Change in Carbon Emissions by Decile 187

• Ex-­post analysis (Heckman et al. 1999; Todd 2007; Vedung 2017;

Increasing use is being made of pilot initiatives using randomized experi­

1.1.1 Complexity and Microsimulation Models

As a modelling framework, microsimulation modelling is a mechanism of

Figure 1.1 Sources of Complexity in Policy Design and Evaluation

These levels of complexity themselves interact with each other, resulting in

Inter-temporal Microsimulation Models Spatial Microsimulation Models

Behaviour Policy Behaviour Policy

Figure 1.2 Enhanced Complexity in Inter-­Temporal and Spatial Microsimulation Models

In the case of models that incorporate either spatial dimensions

1.1.2 Population Complexity

within the population. Decomposing into other dimensions, such as time or

1.1.3 Policy Complexity

Public policy often starts with simple objectives, perhaps in response to a

–150 Hours per Week

T VAT SIC IT CB UA FIS Net Earns

Figure 1.3 Unemployment Trap from Means Testing

–150 Hours per Week

T VAT SIC IT CB UA FIS Net Earns

Figure 1.4 Poverty Trap

1.1.4 Behavioural Complexity

Since the 1980s, a significant amount of tax-­benefit policy reform across

–150 Hours per Week

T VAT SIC IT CB UA FIS Net Earns

• SWITCH–the tax-benefit microsimulation model of the Economic and

Figure 0.1 describes my knowledge-tree equivalent to a genealogical tree

List of Figures xvii

10. Spatial Inequality 239

0.1 Model Knowledge Tree vii

4.6 Lorenz and Concentration Curves 109

2.1 Microsimulation Functionality of Different Software Tools 33

7.9 Percentage Change in Carbon Emissions by Decile 187

• Ex-post analysis (Heckman et al. 1999; Todd 2007; Vedung 2017;

Increasing use is being made of pilot initiatives using randomized experi

Figure 1.2 Enhanced Complexity in Inter-Temporal and Spatial Microsimulation Models

Since the 1980s, a significant amount of tax-benefit policy reform across

complex competing forces resulting in what is known as a backward-

When governments publish their budgetary policy changes, it is often evi

1.2.2 Static Tax-Benefit Microsimulation Models

Figure 1.7 Static Tax-Benefit Model

Figure 1.8 describes the structure of a labour-supply microsimulation model.

Figure 1.8 Labour-Supply Behavioural Models

Figure 1.9 Consumption-Behaviour-Based Models

a useful tool for modelling socio-economic environmental interactions and

Given the capacity to model the incidence of policy on a population, micro

Figure 1.11 Decomposing-Inequality Model

1.2.7 Inter-Temporal Dimension: Dynamic