Does a Scholarship Prove the Income Effect?

At a graduation party among purple balloons and gold table clothes, a student told me that a friend had won a substantial scholarship and he was happy for him. "My friend had taken a job this summer working 14 hours a day to pay for college," Griffen said. "Now he won't have to work as hard. Does this prove the income effect?

According to Ehrenberg, the income effect is a function of the change in hours worked divided by the change in income that takes place when wages are held constant. So suppose you win a scholarship and now your income increases by $50,000. As a result, you now work 40 hours a week instead of 80. The income effect is equal to -40/+50,000. Assuming that your wage rate didn't increase, you worked less as your income increased exongenously. The same effect might be observed if you inherit money or win a lottery.

In this case, the student who won the scholarship might "bend over backward" to increase the amount of time he spends on leisure proving the income effect in his case.

When I heard Nobel laurate Robert Solow speak at Cornell College this past fall, he expressed some skepticism of the income effect. In this econ 101 blog, I simply say that the income effect is one of the many factors that influence behavior of scholarship winners.