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A Theory of Continuum Economies with Idiosyncratic Shocks and Random Matchings

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  • Karavaev, Andrei

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7445.

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Date of creation: 25 Feb 2008
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Handle: RePEc:pra:mprapa:7445

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Keywords: random matching; idiosyncratic shocks; the Law of Large Numbers; aggregate uncertainty; mixing;

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