Labour Studies Index

How Do Expectations Influence Labour Supply? Evidence from Framed Field Experiments

Document type Thesis
Author Stockley, Lisa Marie
Degree Ph.D., Economics
Publisher University of Toronto; Toronto
Date 2018-03
Pages 139 pages
URL https://tspace.library.utoronto.ca/handle/1807/82971

Abstract

Models of reference dependence have improved the connection between economic theory and documented labour supply behaviour. In particular, the Kőszegi and Rabin (2006, 2007, 2009) [hereafter "KR"] theory of expectation based reference dependent preferences appears to be a disciplined way to unify the conflicting wage elasticity estimates, and recent laboratory and natural experiments suggest this theory may work in practice as well. I take this theory to the field in a pair of laboratory-like experiments designed to test if expectations determine the effort of a group of impoverished individuals involved in piece-rate work in Northeast Brazil. I use Abeler, Falk, Goette, and Huffman's (2011) experimental mechanism, which is a clear test of KR preferences in effort provision, in two experiments: first to test if rational expectations act as a reference point that influences effort, and second to test if adaptive expectations act as a reference point that influences effort. In both experiments, I find that although people do not behave in accordance with KR preferences, they do not behave as though they make their decisions following canonical lines either. I then outline a speculative rationale for the observed behaviour in these experiments—the adaptive heuristic of regret matching—where workers are able to evaluate their ex-post feelings of regret, even if they do not know the source of those feelings, to optimize behaviour going forward.