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Reference-Dependent Preferences and the Allocation of Effort over Time: Evidence from Natural Experiments.” Working paper

By Lorenz Goette and David Huffman


We use natural experiments at two firms – plausibly exogenous increases in the piece rate – to study the impact of incentives on within-day effort profiles. Our first finding is that raising the commission rate has zero effect on total effort over the day. This is similar to other studies, which show no effect, or even a negative effect of incentives on effort. However, this evidence is consistent with two competing explanations: lack or response to incentives could be due to fatigue, or it could be due to reference dependent preferences (income targeting). Distinguishing between these explanations is important for understanding what can be done to improve the effectiveness of incentives, and is important because reference dependent preferences may affect the allocation of effort in a broader array of work environments. In this paper we are able to distinguish between these explanations, because our data are richer than previous studies ’ and allow us to look closely at within-day effort profiles. Although we find that a higher piece rate has zero net effect on daily effort, we find a strong effect on the way that effort is allocated within the day. On the higher piece rate, workers exert significantly more effort early in the day, but work significantly less hard later in the day. We show that this pattern is difficult to explain with fatigue: a broad class of fatigue functions predicts a non-negative response of effort to incentives at all points during the day. Furthermore, some plausible forms of fatigue predict that effort should increase most strongly at the end of the day, which is the opposite of what we observe. The effort profiles we observe are, however, consistent with a model in which workers have reference-dependent preferences and a salient daily income goal. We conclude that reference-dependent preferences are important for understanding daily labor supply

Year: 2003
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