econ327 - endowment effect applications

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Last updated 1:58 AM on 9/21/26
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6 Terms

1
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labor supply

worker can choose how many hrs she works every day w/ frequent temporary changes in hr/wage

  • some days she earns $5/hr, others, $10/hr

  • constraint: $/per hour --> 24 hr limit


2
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neoclassical theory of labor supply

predicts a pos relationship (or no relationship) between worker's hrs & wage

  • easier to make more income by working high-wage days & less hrs than the reverse

  • if doesn't like variable hours, work 8 hr/day every day

  • won't work many hrs on low-wage days

    • can test w/ services like uber, instacart, etc


<p>predicts a pos relationship (or no relationship) between worker's hrs &amp; wage</p><ul><li><p>easier to make more income by working high-wage days &amp; less hrs than the reverse</p></li><li><p>if doesn't like variable hours, work 8 hr/day every day</p></li><li><p>won't work many hrs on low-wage days</p><ul><li><p>can test w/ services like uber, instacart, etc</p></li></ul></li></ul><p></p>
3
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daily income targeting

workers have daily income goal they’d like to make

  • lower than goal is painful, but going above is NOT great either (time cost)

    • income targeting explains neg correlation between wages & hrs

    • worker w/ higher wage reach target faster


4
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income targeting

agent wants to achieve $T of earnings

  • λ > 1 --> loss aversion coefficient

    • utility function has kink at T/w


<p>agent wants to achieve $T of earnings </p><ul><li><p><strong>λ &gt; 1</strong> --&gt; loss aversion coefficient</p><ul><li><p>utility function has kink at T/w</p></li></ul></li></ul><p></p>
5
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neoclassical theory of consumption

predicts people will try to smooth their consumption lvls over time

  • b/c diminishing marginal utility of wealth -> consumers prefer smooth over uneven consumption

  • if consumer gets news abt future income, should respond to it today

    • if income increase --> borrow against future income & spend extra money today

    • if income decrease --> save tmr & not cut back too much tomorrow


6
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Shea (1995)

  • next yr's wage increased --> pple increased consumption today

  • next yr's wage decreased --> pple don't decrease consumption

    • asymmetric response

    • CLA model predict consumers spend unexpected gains immediately but delay unexpected losses