Taxi Drivers' Response to Cancellations and No-shows: New Evidence for Reference-dependent Preferences

Abstract

We study how daily labor supply responds to unanticipated earnings shocks among Singapore's taxi drivers using a novel identification strategy that makes use of idiosyncratic variation in booking cancellations and passenger no-shows (CNS) that drivers repeatedly receive. The results provide new and more compelling evidence in support of the income-targeting model of labor supply. Not only the average responses on the extensive margin, but also the responses on the intensive margin as well as the heterogeneous response at different income levels and across driver characteristics are all consistent with the income-targeting model. Drivers work longer and earn more per hour following CNS. The CNS effects exhibit a U-shaped pattern, are strongest when cumulative income is close to the average shift income, and become insignificant when the income level is too low or too high. The effects are most pronounced in the first hour of CNS and fade away quickly afterward. Drivers achieve higher productivity by reducing break time, taking more jobs, driving faster, driving to places with more earning opportunities, and having more time with passengers on board. They choose the response strategies that are complementary to their ability and circumstance such as schedule flexibility and potential for productivity improvement: Those with flexible working schedules tend to prolong their shifts further, while those with flexibility in earnings rate tend to increase their subsequent productivity more. Our novel identification strategy strengthens the empirical literature on daily labor supply, while our findings of the heterogeneity effects offer new insights on income-targeting behaviors.

Keywords: Reference-dependent preferences, Income targeting, Negative shocks, Labor supply, Productivity, Taxi drivers

JEL Classification: J22, J24, D91