Can a Representative Agent Model Represent a Heterogeneous Agent Economy?

Accounting for observed fluctuations in aggregate employment, consumption, and real wage using the optimality conditions of a representative household requires preferences that are incompatible with economic priors. In order to reconcile theory with data, we construct a model with heterogeneous agen...

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Bibliographic Details
Main Authors: AN, Sungbae, CHANG, Yongsung, KIM, Sun-Bin
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2008
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Online Access:https://ink.library.smu.edu.sg/soe_research/543
https://ink.library.smu.edu.sg/context/soe_research/article/1542/viewcontent/CanaRepresentative_AgentModel.pdf
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Institution: Singapore Management University
Language: English
Description
Summary:Accounting for observed fluctuations in aggregate employment, consumption, and real wage using the optimality conditions of a representative household requires preferences that are incompatible with economic priors. In order to reconcile theory with data, we construct a model with heterogeneous agents whose decisions are difficult to aggregate because of incomplete capital markets and the indivisible nature of labor supply. If we were to explain the model-generated aggregate time series using decisions of a stand-in household, such a household must have a nonconcave or unstable utility as is often found with the aggregate US data.