Low Expectations: Reference‐Dependent Preferences and Labor Supply in Cape Town, South Africa

Reference‐dependent decision‐making — the core of behavioral economics' prospect theory — makes people more likely to choose an outcome that they expect to receive. Reference‐dependence therefore may imply the perpetuation of disadvantage: people who do not expect an opportunity may be less likely to “seize the day” if one unexpectedly arrives. We find evidence of this possibility in labor supply decision‐making in two datasets about a high‐unemployment part of Cape Town, South Africa, including a panel. People with low expectations for finding a job — that is, people who expect to be unemployed — are less likely to report accepting several hypothetical job offers. This result is robust to a range of respecifications, including adding a range of control variables for desire and ability to work, including reservation wages. The finding appears to arise according to the theorized mechanisms. To our knowledge, this is the first indication of reference‐dependent labor supply in a developing country, where especially low expectations could have particularly important consequences.