Abstract: This paper reconsiders whether cabdrivers ’ labor supply decisions reflect reference-dependent preferences. Following Botond Kıszegi and Matthew Rabin (2006), we construct a model with targets for hours as well as income, both determined by rational expectations. Estimating using Henry S. Farber’s (2005, 2008) data, we show that the reference-dependent model can reconcile his 2005 finding that drivers ’ stopping probabilities are significantly related to hours but not income with the negative wage elasticity of hours found by Colin Camerer et al. (1997) and Farber (2005, 2008). The model yields sensible estimates that avoid Farber’s (2008) criticism that drivers ’ income targets are too unstable to allow a useful reference-dependent model of labor supply.

In many applications of game theory, there are ample opportunities for learning from experience in previous play of analogous games. In such settings, the cognitive requirements for learning to converge to equilibrium are mild, and experiments suggest that people do in

Abstract: This paper proposes a model of cabdrivers ’ labor supply, building on Henry S. Farber’s (2005, 2008) empirical analyses and Botond Kıszegi and Matthew Rabin’s (2006; henceforth “KR”) theory or reference-dependent preferences. Following KR, our model has targets for hours as well as income, both determined by rational expectations. Estimated with Farber’s data, our model reconciles his finding that stopping probabilities are significantly related to hours but not income with Colin Camerer et al.’s (1997) negative wage elasticity of hours; and avoids his criticism that estimates of drivers ’ income targets are too unstable to yield a useful model of labor supply.