The Role of Reference Dependence and Hyperbolic Discounting Preferences in Labor Supply: Insights from an Optimal Stopping Time Model
Posted: 13 Jul 2011
Date Written: July 12, 2011
We integrate reference dependence and hyperbolic time preferences into the optimal stopping framework to study the agent’s decision on the working duration. A key insight from our theoretical model is that not only income target but patience as well as the interaction between the two plays a role in that decision. Less patient agents may work for shorter durations; having a target helps hyperbolic discounting agents overcome temptation of finishing the work earlier than the optimal stopping time. An estimation strategy is then developed based on both the reduced form and the structural model approach. Using data for Hawaii longline fishery we find that less patient captains seem to have shorter fishing trips. We also find some evidence that fishermen have references (targets) for revenue when making decisions about the length of fishing trips. Together, the findings suggest the necessity to integrate both reference dependence and hyperbolic time preferences into the model of labor supply.
Keywords: Reference Dependence, Hyperbolic Preferences, Income Target, Labor Supply, Fisheries
JEL Classification: C93, D81
Suggested Citation: Suggested Citation