Towards an Understanding of Reference-Dependent Labour Supply: Theory and Evidence from a Field Experiment

We experimentally study the effects of transitory incentives and income predicted by models of reference-dependent labour supply. Visiting an open-air market in India, we induce experimental variation in: (i) incentives by offering vendors a supplemental wage over the course of two days and (ii) income by, one morning, administering a substantial overpayment for a good sold in the market. We find that incentives have a staggered effect on hours worked: initially vendors do not respond, but by the second day their hours worked increases. In response to the overpayment, we find that both hours worked and a measure of effort are unaffected. Collectively these findings suggest vendors supply their labour according to a model where reference dependence is moderated by experience with an incentive regime or by the time at which income is accumulated.