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We study the design of parental leave systems through the lens of an estimated model of parents' joint willingness to pay for parental leave. We estimate the model using Danish register data on almost 200,000 births combined with sharp variation in economic incentives created by the parental leave benefit system. The estimated model reproduces the empirical distribution of leave, including bunching at kinks in household budget sets and a large share of fathers taking little or no leave at all. We provide a menu of counterfactual policy simulations showing substantial interaction effects between earmarked leave, replacement rates and the duration of leave benefits. For example, introducing 9 weeks earmarked parental leave, as stipulated by a recent EU directive, with a low replacement rate increases the leave of fathers only slightly, while it reduces the leave of mothers significantly in our model. Finally, we discuss the efficiency costs of different policies aimed at increasing the parental leave of fathers.

We study the design of parental leave systems through the lens of an estimated model of parents’ joint willingness to pay for parental leave. We estimate the model using Danish register data on almost 200,000 births combined with sharp variation in economic incentives created by the parental leave benefit system. The estimated model reproduces the empirical distribution of leave, including bunching at kinks in household budget sets and a large share of fathers taking little or no leave at all. We provide a menu of counterfactual policy simulations showing substantial interaction effects between earmarked leave, replacement rates and the duration of leave benefits. For example, introducing 9 weeks earmarked parental leave, as stipulated by a recent EU directive, with a low replacement rate increases the leave of fathers only slightly, while it reduces the leave of mothers significantly in our model. Finally, we discuss the efficiency costs of different policies aimed at increasing the parental leave of fathers.

In this paper I investigate the nature of optimization frictions by studying the labor market of Danish students. This particular labor market is an interesting case study as it features a range of special institutional settings that affect students' incentive to earn income and comparing outcomes across these setting effectively allow you to distinguish between different types of frictions. I find that the considered labor market is significantly affected by optimizations frictions, which masks the bunching at kink points normally associated with a positive labor supply elasticity under standard theory. More concretely I find the dominate optimization friction to be individuals' inattention about their earnings during the year, while real adjustment cost and gradual learning appears to be of less importance.