SOCIAL INTERACTIONS IN LABOR SUPPLY

Our research examines the effect of interdependence on estimation and interpretation of earnings/labor supply equations. We consider the cases of (1) a positive spillover from others' labor supplied and (2) a need for conformity with others' labor supplied. Qualitative and quantitative comparative statics results with a Stone‐Geary utility function demonstrate how spillover effects increase labor supply uniformly. Alternatively, conformity effects move labor supplied toward the mean of the reference group so that, in the limit, labor supply becomes perfectly inelastic at the reference group average. When there are unmodeled exogenous social interactions, conventional wage elasticities are still relatively well estimated, although structural parameters may not be. Omitting endogenous social interactions may seriously misrepresent the labor supply effects of policy, however. (JEL: D11, J22, Z13)