Heterogeneity, adverse selection and valuation with endogenous labor supply

This paper considers models of intratemporal consumption–labor choice and intertemporal consumption choice under heterogeneity and private information in preferences towards labor. We show that market regime regarding unemployment insurance is important to determine the effects of heterogeneity and private information on allocations and valuations. There are two main results. First, intertemporal choice can mitigate adverse selection. Second, in countries where unemployment insurance is generous capital markets should have low usage and the risk-free rate of return is low. However, in countries where unemployment insurance is less generous, capital markets should have more usage and the risk-free rate of return is higher. © 2006 Published by Elsevier Inc. JEL classification: D1; G1; J2; J3