2. The standard economic prediction is that a temporary increase in wages should cause people to work longer hours. This prediction is based on the assumption that workers substitute labor and leisure intertemporally, working more when wages are high and consuming more leisure when its price-- the foregone wage-- is low. This prediction is tested using New York City cab drivers.

Drivers face wages which fluctuate on a daily basis due to demand shocks caused by weather, subway breakdowns, day-of-the-week effects, holidays, conventions, etc. Although rates per mile are set by law, on busy days drivers spend less time searching for customers and thus earn a higher hourly wage. Another advantage of studying cab drivers is that, unlike most workers, they choose the number of hours they work each day because drivers lease their cabs from a fleet for a fixed fee (or own them) and can drive as long as they like during a continuous 12-hour shift. Because drivers face wages which fluctuate from day to day, and can work flexible hours, the intertemporal substitution hypothesis makes a clear prediction: Drivers will work longer hours on high-wage days.

However, there is little evidence for positive intertemporal substitution: Drivers work less hours when hourly wages are high. In other words, drivers tend to quit earlier on high wage days drive longer on low wage days.

Discuss possible behavioral factors that can explain why drivers work less hours when hourly wages are high.