Identifying Interdependent Behavior in an Empirical Model of Labor Supply

Abstract

In this paper we test a particular form of interdependent behavior, namely the hypothesis that individuals´ choices of hours of work are influenced by the average hours of work in a social reference group. There are problems to empirically disentangle the effects of interdependent behavior and preference variation across groups. We show that panel data or data from several points in time are needed. In the empirical analysis we combine cross-section data from 1973, 1980 and 1990. Our results support the hypothesis of interdependent behavior. The implication is that conventional tax policy predictions, in which preference interdependencies are neglected, will tend to underestimate the effect of a tax reform on hours of work. Our point estimates suggest that conventional calculations would capture only about a third of the actual change in hours of work.Labor supply; interdependent preferences; nonlinear taxes