Abstract

This note describes the lottery- and insurance-market equilibrium in an economy with
both private and public sector employment and non-convex labor supply. In addition, when
households are constrained to search for jobs only in a certain sector, the framework requires
that there should be separate insurance markets: a public and a private sector one, which would
pool the unemployment risk of the corresponding group of households. The unemployment insurance
market segmentation is a new result in the literature and a direct consequence of the
non-convexity of the labor supply in each sector and the sorting effect of the sector-type shock
introduced in the model setup.