This paper extends the normal continuous time financial friction model to a model with labor market.The goal of this paper is to investigate the interaction between financial constraint and labor market.I started by extending financial market model to a general equilibrium model with labor leisure choice by households,then test it by conducting quantitative exercise.In later section I extended the normal representative agent model to a heterogeneous agent model,and tested the theoretical implication of adding the labor market and allowing a rich interactions between different types of agents.I found that regardless of the initial distribution of wealth,at stationary equilibrium all agents should have the same wealth and the model goes back to equilibrium in representative agent m...[ Read more ]

This paper extends the normal continuous time financial friction model to a model with labor market.The goal of this paper is to investigate the interaction between financial constraint and labor market.I started by extending financial market model to a general equilibrium model with labor leisure choice by households,then test it by conducting quantitative exercise.In later section I extended the normal representative agent model to a heterogeneous agent model,and tested the theoretical implication of adding the labor market and allowing a rich interactions between different types of agents.I found that regardless of the initial distribution of wealth,at stationary equilibrium all agents should have the same wealth and the model goes back to equilibrium in representative agent model.This paper also focuses a lot on the welfare implication of allowing an additional agent to provide labor service.We showed that adding a market allows households to smooth consumption near financial constraint.

Keywords:financial friction,labor leisure choice