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Testing the representative agent assumption: the distribution of parameters in a large-scale model of the EU 1972--1998

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Author Info
Terry Barker
Sebastian A. de-Ramon

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Abstract

This study considers the validity of an assumption of the representative agent often made in economic models, that the behaviour of an economic group is adequately represented by each member of the group having the identical characteristics of the average. It can be tested whenever sufficient data are available to estimate sets of parameters of a model with and without the assumption that they are equal to some average. The specific test of the assumption is done for a set of 720 estimated parameters associated with the effects of technological change on industrial employment for 18 regions of Europe. The main finding is that the parameters are significantly different across industries and across regions and that an assumption that all responses to technological change are the same is not justified. Similar results are found for other parameters studied. This finding implies that the assumption that each industry has the same responses as an average, chosen from a literature review, is likely to be misleading. The data strongly suggest that behaviour is differentiated by industry and region.

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Publisher Info
Article provided by Taylor and Francis Journals in its journal Applied Economics Letters.

Volume (Year): 13 (2006)
Issue (Month): 6 (May)
Pages: 395-398
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Handle: RePEc:taf:apeclt:v:13:y:2006:i:6:p:395-398

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  1. M. Hashem Pesaran, 2004. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  2. Banerjee, Anindya, et al, 1986. "Exploring Equilibrium Relationships in Econometrics through Static Models: Some Monte Carlo Evidence," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 253-77, August.
  3. Gonzalo, J., 1992. "Cointegration and Aggregation," Papers 11, Boston University - Department of Economics.
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  4. Kirman, Alan P, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-36, Spring. [Downloadable!] (restricted)
  5. Hildenbrand, Werner, 1998. "How relevant are specifications of behavioral relations on the micro-level for modelling the time path of population aggregates?," European Economic Review, Elsevier, vol. 42(3-5), pages 437-458, May. [Downloadable!] (restricted)
  6. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics 9215, Faculty of Economics, University of Cambridge.
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  7. Orazio P. Attanasio & Lucio Picci & Antonello E. Scorcu, 2000. "Saving, Growth, and Investment: A Macroeconomic Analysis Using a Panel of Countries," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 182-211, May. [Downloadable!] (restricted)
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