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Do Workers Work More if Wages are High? Evidence from a Randomized Field Experiment

Ernst Fehr () and Lorenz Götte
Authors registered in the RePEc Author Service: Lorenz Goette ()

No 125, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

Abstract: Abstract: Most previous studies on intertemporal labor supply found very small or insignificant substitution effects. It is not clear, however, whether these results are due to institutional constraints on workers’ labor supply choices or whether the behavioral assumptions of the standard life cycle model with time separable preferences are empirically invalid. We conducted a randomized field experiment in a setting in which workers were free to choose their working times and their efforts during working time. We document a large positive wage elasticity of overall labor supply and an even larger wage elasticity of labor hours, which implies that the wage elasticity of effort per hour is negative. While the standard life cycle model cannot explain the negative effort elasticity, we show that a modified neoclassical model with preference spillovers across periods and a model with reference dependent, loss averse preferences are consistent with the evidence. With the help of a further experiment we can show that only loss averse individuals exhibit a significantly negative effort response to the wage increase and that the degree of loss aversion predicts the size of the negative effort response.

Keywords: Labor Supply; Extensive and Intensive Margin; Loss Aversion; Field Experiment (search for similar items in EconPapers)
JEL-codes: D91 J22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cbe and nep-exp
Date: 2005-09
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Related works:
Journal Article: Do Workers Work More if Wages Are High? Evidence from a Randomized Field Experiment (2007) Downloads
Working Paper: Do workers work more if wages are high? Evidence from a randomized field experiment (2002) Downloads
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