The Role of Reference Dependence and Hyperbolic Discounting Preferences in Labor Supply: Insights from an Optimal Stopping Time Model

Posted: 13 Jul 2011

See all articles by Quang Nguyen

Quang Nguyen

Nanyang Technological University (NTU)

Date Written: July 12, 2011

Abstract

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

Nguyen, Quang, The Role of Reference Dependence and Hyperbolic Discounting Preferences in Labor Supply: Insights from an Optimal Stopping Time Model (July 12, 2011). Available at SSRN: https://ssrn.com/abstract=1884252 or http://dx.doi.org/10.2139/ssrn.1884252

Quang Nguyen (Contact Author)

Nanyang Technological University (NTU) ( email )

S3 B2-A28 Nanyang Avenue
Singapore, 639798
Singapore

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