IZA DP No. 3034: Labor Supply with Social Interactions: Econometric Estimates and Their Tax Policy Implications
published in: Research in Labor Economics, 2008, 28, 1-23
Our econometric research allows for a possible response of a person's hours worked to hours typically worked by members of a multidimensional labor market reference group that considers demographics and geographic location. Instrumental variables estimates of the canonical labor supply model expanded to permit social interactions pass a battery of specification checks and indicate positive and economically important spillovers for adult men. Ignoring or incorrectly considering social interactions in male labor supply can mis-estimate the response to tax reform by as much as 60 percent.