Aggregation with a mix of indivisible and continuous labor supply decisions The case of home production

Purpose - The purpose of this paper is to explore the problem of non-convex labor supply decision in an economy with both discrete and continuous labor decisions. In contrast to the setup in McGrattan et al. (1997), here each household faces an indivisible labor supply choice in the market sector, while it can choose to work any number of hours in the non-market sector. Design/methodology/approach - The authors show how lotteries as in Rogerson (1988) can again be used to convexify consumption sets, and aggregation over individual preferences. Findings - With a mix of discrete and continuous labor supply decisions, disutility of non-market work becomes separable from market work, and the elasticity of the latter increases from unity to infinity. Research limitations/implications - As a possible venue for future research, the authors plan to feed the derived aggregate utility function above in a sophisticated real-business-cycle model to investigate the effect of those preferences for the transmission of technology and fiscal shocks. Originality/value - This is a novel and interesting result in the aggregation literature.