The Daily Grind: Cash Needs and Labor Supply

The majority of people in developing countries are self-employed and can therefore set their own work hours. How do self-employed individuals motivate themselves to work hard day after day? We document four facts about the labor supply of Kenyan bicycle-taxi drivers: (1) drivers work more on days with higher cash needs; and (2) the quitting hazard increases once the driver earns enough to meet his day’s need; but (3) the needs are not binding subsistence requirements; and (4) randomized cash payouts have no meaningful effect on labor supply. These results are consistent with models in which workers have reference-dependent preferences over earning targets.

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