Making Reference-Dependent Preferences: Evidence from Door-to-Door Sales

Abstract

People often set goals that they fail to meet. One intuitive way of addressing this is to evaluate one’s progress in smaller components. Theory suggests this should reveal reference-dependent preferences and loss aversion. This paper uses novel data from a sales company to test for reference-dependent daily labor supply as a commitment device to offset present bias for achieving longer-run goals. I show that daily labor supply shifts downward at a worker’s expectations. Daily expectations are selected by workers based on long-run objectives around the bonuses paid by the firm at the end of the sales season. After surpassing their bonus threshold, workers reduce their hours from what was a consistent labor supply in their prior personal equilibrium, consistent with the bonus being the impetus behind daily reference dependence. An online real-effort experiment further supports the idea that short-run reference dependence can be “made” through a firm’s compensation scheme. The experiment implies that this leads to greater firm profitability.

Samuel Dodini

Postdoctoral Fellow in Labor Economics

My broad research interests include empirical explorations of the economics of labor markets, incorporating insights from behavioral economics, occupational licensing, monopsony power, education, public finance, and urban economics.