Minicourse on “ Level - k Thinking ” Monday , 5 October 2008 , National Taiwan University

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. 1 Crawford: Department of Economics, University of California, San Diego. 9500 Gilman Drive, La Jolla, CA 92093-0508 (e-mail: [email protected]); Meng: Department of Economics, University of California, San Diego. 9500 Gilman Drive, La Jolla, CA 92093-0508 (e-mail: [email protected]). We thank Henry Farber, Colin Camerer, and Linda Babcock for sharing their data, and Nageeb Ali, Stefano Dellavigna, Botond Kıszegi, David Miller, Ulrike Malmendier, and Matthew Rabin for insightful comments.