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Loss Aversion and Labor Supply

  • Lorenz Goette

    (University of Zurich,)

  • David Huffman

    (Institute for the Study of Labor,)

  • Ernst Fehr

    (University of Zurich and CEPR,)

In many occupations, workers' labor supply choices are constrained by institutional rules regulating labor time and effort provision. This renders explicit tests of the neoclassical theory of labor supply difficult. Here we present evidence from studies examining labor supply responses in "neoclassical environments" in which workers are free to choose when and how much to work. Despite the favorable environment, the results cast doubt on the neoclassical model. They are, however, consistent with a model of reference-dependent preferences exhibiting loss aversion and diminishing sensitivity. (JEL: J22, B49) Copyright (c) 2004 The European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 2 (2004)
Issue (Month): 2-3 (04/05)
Pages: 216-228

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Handle: RePEc:tpr:jeurec:v:2:y:2004:i:2-3:p:216-228
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  1. Ernst Fehr & Lorenz Goette, 2002. "Do workers work more if wages are high? Evidence from a randomized field experiment," Natural Field Experiments 00240, The Field Experiments Website.
  2. Gerald S. Oettinger, 1999. "An Empirical Analysis of the Daily Labor Supply of Stadium Vendors," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 360-392, April.
  3. Henry S. Farber, 2003. "Is Tomorrow Another Day? The Labor Supply Of New York Cab Drivers," Working Papers 110, Princeton University, Department of Economics, Center for Economic Policy Studies..
  4. repec:tpr:qjecon:v:112:y:1997:i:2:p:407-41 is not listed on IDEAS
  5. Camerer, Colin & Babcock, Linda & Loewenstein, George & Thaler, Richard, 1996. "Labor Supply of New York City Cab Drivers: One Day At A time," Working Papers 960, California Institute of Technology, Division of the Humanities and Social Sciences.
  6. Henry S. Farber, 2003. "Is Tomorrow Another Day? The Labor Supply of New York City Cab Drivers," Working Papers 852, Princeton University, Department of Economics, Industrial Relations Section..
  7. Fehr, Ernst & Götte, Lorenz, 2004. "Do Workers Work More When Wages Are High? Evidence from a Randomized Field Experiment," IZA Discussion Papers 1002, Institute for the Study of Labor (IZA).
  8. Henry Farber, 2003. "Is Tomorrow Another Day? The Labor Supply of New York Cab Drivers," NBER Working Papers 9706, National Bureau of Economic Research, Inc.
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