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Loss Aversion and Adaptation in the Labor Market: Empirical Indifference Functions and Labor Supply

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  • Dunn, L F

Abstract

This paper presents empirically determined indifference functions for income and leisure which exhibit the phenomena of loss aversion and a utility reference point determined by adaptation, as expounded by Kahneman and Tversky and others. Data for this study were gathered in original surveys of seven diverse labor markets. The indifference functions of all show common features consistent with loss aversion/adaptation. These features help explain stability in labor markets in the face of an overtime premium which prevents the many workers in the United States from being at an optimal equilibrium and causes discontinuities in labor supply curves. Labor supply curves derived from indifference curves with the loss aversion adaptation features have much smaller discontinuities than those based on simulated curves without these features. Copyright 1996 by MIT Press.

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  • Dunn, L F, 1996. "Loss Aversion and Adaptation in the Labor Market: Empirical Indifference Functions and Labor Supply," The Review of Economics and Statistics, MIT Press, vol. 78(3), pages 441-450, August.
  • Handle: RePEc:tpr:restat:v:78:y:1996:i:3:p:441-50
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    Cited by:

    1. Dohmen, Thomas, 2014. "Behavioral labor economics: Advances and future directions," Labour Economics, Elsevier, vol. 30(C), pages 71-85.
    2. Ran, Tao & Keithly, Walter R., Jr. & Yue, Chengyan, 2014. "Reference-Dependent Preferences in Gulf of Mexico Shrimpers' Fishing Effort Decision," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 0(Number 1), pages 1-15, April.
    3. Peters, Hans, 2012. "A preference foundation for constant loss aversion," Journal of Mathematical Economics, Elsevier, vol. 48(1), pages 21-25.
    4. Georgellis, Yannis & Gregoriou, Andros & Tsitsianis, Nikolaos, 2008. "Adaptation towards reference values: A non-linear perspective," Journal of Economic Behavior & Organization, Elsevier, vol. 67(3-4), pages 768-781, September.
    5. W. Wong & R. Chan, 2008. "Prospect and Markowitz stochastic dominance," Annals of Finance, Springer, vol. 4(1), pages 105-129, January.
    6. Ahrens, Steffen & Pirschel, Inske & Snower, Dennis J., 2014. "A theory of wage adjustment under loss aversion," Kiel Working Papers 1977, Kiel Institute for the World Economy (IfW).
    7. Rizzo, John A. & Zeckhauser, Richard J., 2007. "Pushing incomes to reference points: Why do male doctors earn more?," Journal of Economic Behavior & Organization, Elsevier, vol. 63(3), pages 514-536, July.
    8. Berg, Nathan, 2006. "Behavioral Labor Economics," MPRA Paper 26366, University Library of Munich, Germany.
    9. Doerrenberg, Philipp & Duncan, Denvil & Loeffler, Max, 2016. "Asymmetric Labor-Supply Responses to Wage-Rate Changes: Evidence from a Field Experiment," IZA Discussion Papers 9683, Institute for the Study of Labor (IZA).
    10. Mohammed Abdellaoui & Han Bleichrodt & Corina Paraschiv, 2007. "Loss Aversion Under Prospect Theory: A Parameter-Free Measurement," Management Science, INFORMS, vol. 53(10), pages 1659-1674, October.
    11. Anthony Yates, 1998. "Downward nominal rigidity and monetary policy," Bank of England working papers 82, Bank of England.
    12. Eil, David & Lien, Jaimie W., 2014. "Staying ahead and getting even: Risk attitudes of experienced poker players," Games and Economic Behavior, Elsevier, vol. 87(C), pages 50-69.
    13. repec:bla:ausecr:v:50:y:2017:i:2:p:137-151 is not listed on IDEAS
    14. Patricia Tovar, 2004. "The Effects of Loss Aversion on Trade Policy and the Anti-Trade Bias Puzzle," Econometric Society 2004 North American Summer Meetings 499, Econometric Society.

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