New York City Cabdrivers' Labor Supply Revisited: Reference-Dependence Preferences with Rational-Expectations Targets for Hours and Income

This paper reconsiders whether cabdrivers' labor supply decisions reflect reference-dependent preferences. Following Botond Koszegi 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.