intertemporal budget constraint and discrete (labor) decisions about egdst

[fexler]

One possible solution just came to my mind:

Could I simply re-interpret today's shock and discrete decision dc1 as being of next priod in my interpretation of the model or does that raise any issues I am not aware of?

Using id1 or dc1n in the budget constraint did create errors of unknown variables.

[fediskhakov]

Florian, this is answered in our email correspondence, I believe. Just copying the relevant part here for the record:
The issue you raise is not specific to EGM, it is specific to the model, whatever method you use to solve it. With the labour supply model it's just a trick we use to avoid the need for another state variable, this is my understanding at least. We accept the assumption that the labour supply decisions are made before the realization of the shock to productivity or wage, and thus the shocks do not have to enter the state space (which is by definition the information used to base the choice on), instead they are idiosyncratic and can be integrated our in the Bellman equation. This would not to be the case if we want to model serial correlation or allow the decision maker to learn the shock before making the choice.