Identifying interdependent behaviour in an empirical model of labour supply

In this paper we test a particular form of interdependent behaviour, namely the hypothesis that individuals' choices of hours of work are influenced b y the average hours of work in a social reference group. There are problems in empirically disentangling the effects of interdependent behaviour and p reference variation across groups. We show that panel data or data from sev eral points in time are needed, In the empirical analysis we combine cross- section data from 1973, 1980, and 1990. Our results support the hypothesis of interdependent behaviour. The implication is that conventional tax polic y predictions, in which preference interdependencies are neglected, will te nd to underestimate the effect of a tax reform on hours of work. Our point estimates suggest that conventional calculations would capture only about a third of the actual change in hours of work. Copyright (C) 1999 John Wiley & Sons, Ltd.