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

39 Pages Posted: 24 Nov 2014 Last revised: 17 Jan 2022

See all articles by Steffen Andersen

Steffen Andersen

Copenhagen Business School - Department of Finance; CEPR

Alec Brandon

University of Chicago; Johns Hopkins University - Carey Business School

Uri Gneezy

University of California, San Diego (UCSD) - Rady School of Management

John A. List

University of Chicago - Department of Economics

Date Written: November 2014

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.

Suggested Citation

Andersen, Steffen and Brandon, Alec and Gneezy, Uri and List, John A., Toward an Understanding of Reference-Dependent Labor Supply: Theory and Evidence from a Field Experiment (November 2014). NBER Working Paper No. w20695, Available at SSRN: https://ssrn.com/abstract=2529848

Steffen Andersen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

CEPR ( email )

London
United Kingdom

Alec Brandon

University of Chicago ( email )

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Uri Gneezy

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

John A. List

University of Chicago - Department of Economics ( email )

1126 East 59th Street
Chicago, IL 60637
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
20
Abstract Views
481
PlumX Metrics