Can a Representative-Agent Model Represent a Heterogeneous-Agent Economy

Sungbae An, Yongsung Chang () and Sun-Bin Kim

American Economic Journal: Macroeconomics, 2009, vol. 1, issue 2, pages 29-54

Abstract: 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. (JEL E13, E24)

Date: 2009

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Related works:
Working Paper: Can a Representative Agent Model Represent a Heterogeneous Agent Economy? (2007)
Working Paper: Can a Representative-Agent Model Represent a Heterogeneous-Agent Economy? (2008)
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