Within-Year Uncertainty and Perception of Year-End Work Incentives

Abstract

While taxes are based on year-end income, people often face uncertainty about the next month’s earnings and make multiple labor supply decisions during the year. Using a regression discontinuity approach, we analyze a mid-year informational treatment that provides information about the year-end tax-benefit schedule to Norwegian welfare recipients. Consistent with a simple model of (mis-)perceived incentives, individuals with stable earnings modify their year-end earnings target while those with variable earnings do not display any response. The findings suggest that the value of information depends on the stability of the labor environment and has important implications for the targeting efficiency of information policies.

Keywords: Labor Supply, information frictions, welfare programs, Disability Insurance