AGGREGATION WITH A NON-CONVEX LABOR SUPPLY DECISION, UNOBSERVABLE EFFORT, AND INCENTIVE (“FAIR”) WAGES
The purpose of this note is to explore the problem of a non-convex labor supply decision in an economy with unobservable e_ort and incentive ("fair") wages a la Danthine and Kurmann (2004), and explicitly perform the aggregation presented there without a formal proof, and thus provide - starting from micro-foundations - the derivation of the expected utility functions used for the aggregate household. We show how lotteries as in Rogerson (1988) can be used to convexify consumption sets, and aggregate over individual preferences. With a discrete labor supply decisions, the elasticity of aggregate labor supply becomes a function of effort
 Hansen, G. 1985. Indivisible labor and the business cycle, Journal of Monetary Economics 16: 309-327.
 Rogerson, R. 1988. Indivisible labor, lotteries and equilibrium, Journal of Monetary Economics 21: 3-16.
 Vasilev, A. 2017. A Real-Business-Cycle model with reciprocity in labor relations and fiscal policy: the case of Bulgaria, Bulgarian Economics Papers 03-2017 (2017), Center for Economic Theories and Policies, Sofia University St. Kliment Ohridski, Sofia, Bulgaria.
Non-Exclusive License under Attribution 4.0 International Public License (CC BY 4.0):
This ‘Article’ is distributed under the terms of the license CC-BY 4.0., which lets others distribute, remix, adapt, and build upon this article, even commercially, as long as they credit this article for the original creation. ASERS Publishing will be acknowledged as the first publisher of the Article and a link to the appropriate bibliographic citation (authors, article title, volume issue, page numbers, DOI, and the link to the Published Article on ASERS Publishing’ Platform) must be maintained.