Abstract

The objective of this paper is to study the problem of a discrete labour supply decision in an artificial
economy where the households feature habits in consumption. We demonstrate how lotteries a la Rogerson (1988)
can be used to make consumption choices into convex sets, and then produce an equivalent aggregate household
with convex labour supply. The presence of consumption habits does not affect the main results of the paper. As
in Hansen (1985) and Rogerson (1988) and no consumption habits, with a discrete labor supply decision at
individual level, the elasticity of hours worked at the aggregate level increases from one to an infinitely large value.