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

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Author Info
Sungbae An
Yongsung Chang
Sun-Bin Kim

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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)

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 1 (2009)
Issue (Month): 2 (July)
Pages: 29-54
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Handle: RePEc:aea:aejmac:v:1:y:2009:i:2:p:29-54

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This page was last updated on 2009-11-26.

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