Toward an Understanding of Reference-Dependent Labor Supply: Theory and Evidence From a Field Experiment

Steffen Andersen, Alec Brandon, Uri Gneezy, John A. List

Research output: Working paperResearch

Abstract

Perhaps the most powerful form of framing arises through reference dependence, wherein choices are made recognizing the starting point or a goal. In labor economics, for example, a form of reference dependence, income targeting, has been argued to represent a serious challenge to traditional economic models. We design a field experiment linked tightly to three popular economic models of labor supply—two behavioral variants and one simple neoclassical model—to deepen our understanding of the positive implications of our major theories. Consistent with neoclassical theory and reference-dependent preferences with endogenous reference points, workers (vendors in open air markets) supply more hours when presented with an expected transitory increase in hourly wages. In contrast with the prediction of behavioral models, however, when vendors earn an unexpected windfall early in the day, their labor supply does not respond. A key feature of our market in terms of parsing the theories is that vendors do not post prices rather they haggle with customers. In this way, our data also speak to the possibility of reference-dependent preferences over other dimensions. Our investigation again yields results that are in line with neoclassical theory, as bargaining patterns are unaffected by the unexpected windfall.
Perhaps the most powerful form of framing arises through reference dependence, wherein choices are made recognizing the starting point or a goal. In labor economics, for example, a form of reference dependence, income targeting, has been argued to represent a serious challenge to traditional economic models. We design a field experiment linked tightly to three popular economic models of labor supply—two behavioral variants and one simple neoclassical model—to deepen our understanding of the positive implications of our major theories. Consistent with neoclassical theory and reference-dependent preferences with endogenous reference points, workers (vendors in open air markets) supply more hours when presented with an expected transitory increase in hourly wages. In contrast with the prediction of behavioral models, however, when vendors earn an unexpected windfall early in the day, their labor supply does not respond. A key feature of our market in terms of parsing the theories is that vendors do not post prices rather they haggle with customers. In this way, our data also speak to the possibility of reference-dependent preferences over other dimensions. Our investigation again yields results that are in line with neoclassical theory, as bargaining patterns are unaffected by the unexpected windfall.
LanguageEnglish
Place of PublicationCambridge, MA
PublisherNational Bureau of Economic Research (NBER)
Number of pages38
DOIs
StatePublished - Nov 2014
SeriesNational Bureau of Economic Research. Working Paper Series
Number20695
ISSN0898-2937

Cite this

Andersen, S., Brandon, A., Gneezy, U., & List, J. A. (2014). Toward an Understanding of Reference-Dependent Labor Supply: Theory and Evidence From a Field Experiment. Cambridge, MA: National Bureau of Economic Research (NBER). National Bureau of Economic Research. Working Paper Series, No. 20695, DOI: 10.3386/w20695
Andersen, Steffen ; Brandon, Alec ; Gneezy, Uri ; List, John A./ Toward an Understanding of Reference-Dependent Labor Supply : Theory and Evidence From a Field Experiment. Cambridge, MA : National Bureau of Economic Research (NBER), 2014. (National Bureau of Economic Research. Working Paper Series; No. 20695).
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Andersen, S, Brandon, A, Gneezy, U & List, JA 2014 'Toward an Understanding of Reference-Dependent Labor Supply: Theory and Evidence From a Field Experiment' National Bureau of Economic Research (NBER), Cambridge, MA. DOI: 10.3386/w20695

Toward an Understanding of Reference-Dependent Labor Supply : Theory and Evidence From a Field Experiment. / Andersen, Steffen; Brandon, Alec; Gneezy, Uri; List, John A.

Cambridge, MA : National Bureau of Economic Research (NBER), 2014.

Research output: Working paperResearch

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Andersen S, Brandon A, Gneezy U, List JA. Toward an Understanding of Reference-Dependent Labor Supply: Theory and Evidence From a Field Experiment. Cambridge, MA: National Bureau of Economic Research (NBER). 2014 Nov. Available from, DOI: 10.3386/w20695