A Theory of Continuum Economies with Idiosyncratic Shocks and Random Matchings

Andrei Karavaev ()

MPRA Paper from University Library of Munich, Germany

Abstract: Many economic models use a continuum of negligible agents to avoid considering one person's effect on aggregate characteristics of the economy. Along with a continuum of agents, these models often incorporate a sequence of independent shocks and random matchings. Despite frequent use of such models, there are still unsolved questions about their mathematical justification. In this paper we construct a discrete time framework, in which major desirable properties of idiosyncratic shocks and random matchings hold. In this framework the agent space constitutes a probability space, and the probability distribution for each agent is replaced by the population distribution. Unlike previous authors, we question the assumption of known identity - the location on the agent space. We assume that the agents only know their previous history - what had happened to them before, - but not their identity. The construction justifies the use of numerous dynamic models of idiosyncratic shocks and random matchings.

Keywords: random matching; idiosyncratic shocks; the Law of Large Numbers; aggregate uncertainty; mixing (search for similar items in EconPapers)
JEL-codes: C78 D83 E00 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-gth and nep-mac
Date: 2008-02-25
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Persistent link: http://EconPapers.repec.org/RePEc:pra:mprapa:7445

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