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Wage Elasticities in Working and Volunteering: The Role of Reference Points in a Laboratory Study

Author

Listed:
  • Christine L. Exley

    (Harvard Business School, Boston, Massachusetts 02163)

  • Stephen J. Terry

    (Boston University, Boston, Massachusetts 02215)

Abstract
We experimentally test how effort responds to wages—randomly assigned to accrue to individuals or to a charity—in the presence of expectations-based reference points or targets. When individuals earn money for themselves, higher wages lead to higher effort with relatively muted targeting behavior. When individuals earn money for a charity, higher wages instead lead to lower effort with substantial targeting behavior. A reference-dependent theoretical framework suggests an explanation for this differential impact: when individuals place less value on earnings, such as when accruing earnings for a charity instead of themselves, more targeting behavior and a more sluggish response to incentives should result. Results from an additional experiment add support to this explanation. When individuals select into earning money for a charity and thus likely place a higher value on those earnings, targeting behavior is muted and no longer generates a negative effort response to higher wages.

Suggested Citation

  • Christine L. Exley & Stephen J. Terry, 2019. "Wage Elasticities in Working and Volunteering: The Role of Reference Points in a Laboratory Study," Management Science, INFORMS, vol. 65(1), pages 413-425, January.
    • Handle: RePEc:inm:ormnsc:v:65:y:2019:i:1:p:413-425
    DOI: 10.1287/mnsc.2017.2870
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    More about this item

    Keywords

    reference points; wage elasticities; labor supply; effort; volunteering; prosocial behavior;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy; Intergenerational Transfers
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods

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