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

• Published in: Management science Vol. 65; no. 1; pp. 413 - 425
• Main Authors: Exley, Christine L, Terry, Stephen J
• Format: Journal Article
• Language: English
• Published: Linthicum INFORMS 01.01.2019; Institute for Operations Research and the Management Sciences
• Subjects: Analysis; Behavior; Charities; Charity; Earnings; effort; Elasticity; Elasticity (Economics); Incentives; labor supply; Money; prosocial behavior; reference points; volunteering; Volunteers; wage elasticities; Wages; Wages & salaries; United States
• ISSN: 0025-1909; 1526-5501
• DOI: 10.1287/mnsc.2017.2870

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. Data and the online appendix are available at https://doi.org/10.1287/mnsc.2017.2870 . This paper was accepted by Uri Gneezy, behavioral economics.