Abstract
This paper studies how flexible labor decisions affect asset pricing in a Real Business Cycle model. It uses Jaimovich-Rebelo preferences with internal habits in consumption and distinguishes between two income effect channels: (i) the `habit income effect' channel and (ii) the `separability income effect' channel. I find that asset prices are superior when the first channel is strong and the second is weak, this is the case of using GHH preferences with internal habits in consumption.
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