Social interactions and habit formation in a model of female labour supply

This paper investigates the influence of habit formation and preference interdependence on labour supply behaviour of married females. A novelty of the paper is that we incorporate direct survey information on reference groups of individuals in a neoclassical labour supply model. For that purpose we first estimate a latent variables model relating the direct information to the 'true' but unobserved reference groups. One of the most interesting features of the model is that the presence of young children becomes an insignificant factor in the hours equation while it remains a significant factor in the participation decision. In addition, the labour supply curve is much flatter in a model with habit formation and preference interdependence than in a model without it. Both habit formation and preference interdependence contribute significantly to the explanation of female labour supply. (C) 1998 Elsevier Science S.A. All rights reserved.