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Wage Elasticities in Working and Volunteering: The Role of Reference Points in a Laboratory Study

Christine L. Exley () and Stephen Terry ()
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Christine L. Exley: Harvard Business School, Negotiation, Organizations & Markets Unit

No 16-062, Harvard Business School Working Papers from Harvard Business School

Abstract: We experimentally test how effort responds to wages - randomly assigned to accrue to individuals or to a charity - in the presence of expectations-based reference points or targets. When individuals earn money for themselves, higher wages lead to higher effort with relatively muted targeting behavior. When individuals earn money for a charity, higher wages instead lead to lower effort with substantial targeting behavior. A reference-dependent theoretical framework suggests an explanation for this differential impact: when individuals place less value on earnings, such as when accruing earnings for a charity instead of themselves, more targeting behavior and a more sluggish response to incentives should result. Results from an additional experiment add support to this explanation. When individuals select into earning money for a charity and thus likely place a higher value on those earnings, targeting behavior is muted and no longer generates a negative effort response to higher wages.

Keywords: reference points; wage elasticities; labor supply; effort; volunteering; prosocial behavior (search for similar items in EconPapers)
JEL-codes: D12 D64 D84 J22 H41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp, nep-hrm and nep-soc
Date: 2015-09, Revised 2017-06
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