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Do Workers Work More When Wages Are High? Evidence from a Randomized Field Experiment

Ernst Fehr () and Lorenz Götte ()
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Lorenz Götte: University of Bonn

Authors registered in the RePEc Author Service: Lorenz Goette ()

No 1002, IZA Discussion Papers from Institute of Labor Economics (IZA)

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: loss aversion; intertemporal substitution; labor supply (search for similar items in EconPapers)
JEL-codes: B49 C93 J22 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2004-01
New Economics Papers: this item is included in nep-cbe, nep-lab and nep-ltv
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Published - published in: American Economic Review, 2007, 97 (1), 298-317

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