infonet-economy

It is well known that agents may smooth out non-convexities using lotteries. Can agents use time and money instead? We show that in a labor model with a fixed cost of working, workers perfectly smooth their consumption if they have access to money governed by the Friedman rule. Away from the Friedman rule, workers repeat their choices over money cycles of finite length. They begin cycles with no money and end cycles by spending all of their money on vacations. A hot-potato effect causes workers to front-load consumption to the start of each money cycle, which is an inefficient distortion away from perfect consumption smoothing.