Intertemporal Substitution or Reference-Dependent Preferences? Evidence from Daily Labor Supply of South Indian Boat-owners

We study the labor supply of South Indian boat-owners using daily data on labor force participation and the value of catches from 2000 to 2007. Our panel is among the most extensive ever used for this purpose and the …rst to pertain to a non-service related occupation in a developing country. Our analysis compares two hypotheses about the response of labor supply to increases in wages and income: the conventional framework of intertemporal substitution versus reference-dependent preferences. We show that boat-owners’labor participation depends not only on their expected earnings but also on their recent earnings, supporting income-referencedependent preferences models. In our preferred speci…cations, participation elasticities with respect to expected earnings range between 0.57 and 0.61 while the responsiveness to changes in recent income is (in absolute value) a tenth the magnitude of the response to changes in expected earnings. The richness of our data allows us to estimate a participation equation conditional on expected earnings, recent earnings, recent e¤ort, and individual e¤ects. We exploit di¤erent sets of earnings shifters to identify participation elasticities (internationallydetermined prices, lunar phases, and wind direction). Finally, our results also imply that short-term labor supply models should include recent earnings conditional on recent hours or days worked as an explanatory variable. Since recent earnings are positively correlated with expected earnings and negatively related to the probability of participation, omitting this variable yields downwardly-biased elasticity estimates. We thank Kevin Lang, Daniele Paserman, and Dilip Mookherjee for insightful comments and advice. Thanks to Iván Fernández-Val, Jordi Jaumandreu, and Marc Rysman for great suggestions and discussions. Thanks to participants at the IZA Summer School in Labor Economics and the Empirical Microeconomics Lunch at Boston University. We very much appreciate the data., information and assistance facilitated by Felipe Fernández from Fish Information Services, Rexon Fernando, and Daniel Martínez from Mercabarna. Mónica Martínez-Bravo and Marian Vidal-Fernández are grateful to the Fundación Ramón Areces for …nancial support.