Indivisible-labor, lotteries and idiosyncratic productivity shocks

This paper extends the indivisible-labor model by Hansen [J. Monet. Econ. 16 (1985) 309] and Rogerson [J. Monet. Econ. 21 (1988) 3] to include multiple consumers who differ in initial wealth and whose labor productivities are subject to idiosyncratic shocks. In the presence of idiosyncratic uncertainty, the optimal allocations for the individual employment probabilities are at corners: agents work with probability one (zero) when their productivities are high (low). As in Hansen [J. Monet. Econ. 16 (1985) 309], each agent in our indivisible-labor economy behaves as if her labor choice was divisible and her utility function was linear in hours worked. However, the quasi-linearity of the social preferences, established in Hansen [J. Monet. Econ. 16 (1985) 309] for the homogeneousagent case, does not survive after the introduction of idiosyncratic shocks. D 2004 Elsevier B.V. All rights reserved.