Abstract

This paper describes the lottery- and insurance-market equilibrium in an
economy with non-convex market-sector employment and informal sector work. In
contrast to Vasilev 2016a, the discrete-continuous labor supply decision in this paper
is a sequential one, and instead of home production, we focus on informal activity.
The presence of non-convexity requires that an insurance market for market-sector
employment be put in operation to achieve market completeness. In addition, given
that the labor choice for market work and informal-sector hours is made in succes-
sion, the insurance market for market employment needs to close before the labor
supply choice in the grey economy is made. This timing is reminiscent of the results
obtained in Vasilev 2016b) and also a direct consequence of the sequential nature of
the discrete-continuous sectoral labor supply decision.