Near-Rational Equilibria in Heterogeneous-Agent Models: A Verification Method

Leonid Kogan and Indrajit Mitra

No 30111, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose a general simulation-based procedure for estimating quality of approximate policies in heterogeneous-agent equilibrium models, which allows to verify that such approximate solutions describe a near-rational equilibrium. Our procedure endows agents with superior knowledge of the future path of the economy, while imposing a suitable penalty for such foresight. The relaxed problem is more tractable than the original, and results in an upper bound on agents’ welfare. Our method applies to various solution algorithms. We illustrate our approach in two applications: the incomplete-markets model of Krusell and Smith (1998) and the heterogeneous firm model of Khan and Thomas (2008).

JEL-codes: C02 C18 C63 C68 E00 E37 G1 (search for similar items in EconPapers)
Date: 2022-06
New Economics Papers: this item is included in nep-cmp, nep-dem, nep-dge and nep-mac
Note: AP
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Working Paper: Near-Rational Equilibria in Heterogeneous-Agent Models: A Verification Method (2021)
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