Labor-Leisure Choice: Is Everything as Straightforward as One Might Have Thought?
Theoretical Economics Letters (TEL)
argue that a full understanding of a rational
labor supply choice in a standard dynamic life cycle framework is obscure, despite the framework’s being
seemingly self-explanatory, straight-forward, and intuitively sensible.
In a completely friction-free environment, we, to our knowledge, are the first
to provide a complete analytic solution to the benchmark model that presumes a
kind of labor supply behavior that is typically taken as the standard in
economic studies. We find that such standard behavior holds only for a narrow
set of parameters. For many alternative parameterizations, the labor supply
behavior of a rational agent is either highly unrealistic, or extremely hard to
predict and interpret. A complete understanding of a rational, intertemporal labor
supply choice requires further analysis.