Do Workers Work More if Wages Are High? Evidence from a Randomized Field Experiment

Most previous studies on intertemporal labor supply found very small or insignificantnsubstitution effects. It is not clear, however, whether these results are due to institutionalnconstraints on workers’ labor supply choices or whether the behavioral assumptions of thenstandard life cycle model with time separable preferences are empirically invalid. We conducted a randomized field experiment in a setting in which workers were free to choose their working times and their efforts during working time. We document a large positive wage elasticity of overall labor supply and an even larger wage elasticity of labor hours, which implies that the wage elasticity of effort per hour is negative.nWhile the standard life cycle model cannot explain the negative effort elasticity, we show that a modified neoclassical model with preference spillovers across periods and a model withnreference dependent, loss averse preferences are consistent with the evidence. With the help of anfurther experiment we can show that only loss averse individuals exhibit a significantly negativeneffort response to the wage increase and that the degree of loss aversion predicts the size of the negative effort response