Insurance-markets Equilibrium with Sequential Non-convex Market-Sector- and Divisible Informal-Sector Labor Supply

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 succession, 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.