Abstract

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.