This paper investigates the life cycle costs of being too overconfident about future employment possibilities. Focusing on women who experience child-related career breaks, a dynamic discrete choice model of female labor supply is estimated. A novel strategy is developed to identify expectations about future employment possibilities from labor supply choices. The strategy exploits reactions at the end of employment protection for mothers who have been regularly employed before the birth of a child. Reforms that change the length of this protection period allow to separately identify each of expectations, job-arrival rates, and preferences. Validated by suggestive evidence, the estimated life cycle model indicates that expectations are substantially upwards biased: on average women expect the half-yearly job arrival rate to be 1.6 times as high as the actual rate. This overconfidence significantly prolongs child-related career breaks and increases the number of mothers who never return to employment. Although lifetime labor market earnings drop by 14% when overconfident, individual consumption decreases only by around 4%. This difference is due to joint taxation, and most husbands are continuously working full-time while mothers tend to work part-time.
This paper presents a natural instrument to identify time preferences in dynamic discrete choice models. In settings, in which decision-makers face a probabilistic choice restriction of their regular choice set, an exogenous variation of these restriction probabilities can be exploited to identify time preferences. Identification is possible since restriction probabilities do not enter flow utilities, but change future expected utilities. Thus, differences in observed choice probabilities of groups with different restriction probabilities can be linked to the value of the discount factor. The paper discusses which conditions are necessary to separately identify restriction probabilities and flow utilities, and allow to recover the discount factor. It is argued that these conditions exist in various settings, especially in labor economics, where unemployed individuals need to rely on probabilistic job offers to be able to choose employment.
We estimate a dynamic life-cycle model of labor supply with a focus on women's time preferences. We extend the dynamic discrete choice model of female labor supply to accommodate potentially time-inconsistent behavior. To identify time preferences, we exploit natural experiments: we use several parental leave reforms in Germany which extend parental leave from one to three years. Preliminary results provide evidence for significant time-inconsistency. Child-related career breaks are, on average longer when women exhibit time-inconsistent behavior. Our approach allows us to shed light on the importance of time preferences in explaining important labor supply choices.