Adv Behav Econ pdf

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B E H A V I O R A L E C O N O M I C S

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C A M E R E R A N D L O E W E N S T E I N
life cycle. In addition, workers seem to derive positive utility from increasing
wage profiles, per se, perhaps because rising wages are a source of self-esteem;
the desire for increasing payments is much weaker for nonwage income (see
Loewenstein and Sicherman 1991).
The standard life-cycle account of labor supply also implies that workers
should intertemporally substitute labor and leisure based on the wage rate that
they face and the value that they place on leisure at different points in time. If
wage fluctuations are temporary, workers should work long hours when wages
are high and short hours when wages are low. However, because changes in
wages are often persisting, and because work hours are generally fixed in the
short run, it is in practice typically difficult to tell whether workers are substitut-
ing intertemporally (though see Mulligan 1998). Camerer et al. (1997 and in this
volume) studied labor supply of cab drivers in New York City. Cab drives repre-
sent a useful source of data for examining intertemporal substitution because
drivers rent their cabs for a half-day and their work hours are flexible (they can
quit early, and often do), and wages fluctuate daily because of changes in weather,
day-of-the-week effects, and so forth. Their study was inspired by an alternative
to the substitution hypothesis: Many drivers say that they set a daily income target
and quit when they reach that target (in behavioral economics language, they iso-
late their daily decision and are averse to losing relative to an income target). Dri-
vers who target daily will drive longer hours on low-wage days and quit early on
high-wage days. This behavior is exactly the 
opposite
of intertemporal substitu-
tion. Camerer et al. found that data from three samples of inexperienced drivers
support the daily targeting prediction. But experienced drivers do not have nega-
tive elasiticies, either because target-minded drivers earn less and self-select out
of the sample of experienced drivers, or drivers learn over time to substitute rather
than target.
Perhaps the simplest prediction of labor economics is that the supply of labor
should be upward sloping in response to a transitory increase in wage. Gneezy
and Rustichini (this volume) document one situation in which this is not the case.
They hired students to perform a boring task and either paid them a low piece-
rate, a moderately high piece-rate, or no piece-rate at all. The surprising finding
was that individuals in the low piece-rate condition produce the lowest “output”
levels. Paying subjects, they argued, caused subjects to think of themselves as
working in exchange for money and, when the amount of money was small, they
decided that it simply wasn’t worth it. In another study reported in their chapter,
they showed a similar effect in a natural experiment that focused on a domain
other than labor supply. To discourage parents from picking their children up late,
a day-care center instituted a fine for each minute that parents arrived late at the
center. The fine had the perverse effect of 
increasing 
parental lateness. The au-
thors postulated that the fine eliminated the moral disapprobation associated with
arriving late (robbing it of its gift-giving quality) and replaced it with a simple
monetary cost that some parents decided was worth incurring. Their results show
that the effect of price changes can be quite different than in economic theory
when behavior has moral components that wages and prices alter.

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