A Theory of Continuum Economies with Idiosyncratic Shocks and Random Matchings
AbstractMany 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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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 7445.
Date of creation: 25 Feb 2008
Date of revision:
random matching; idiosyncratic shocks; the Law of Large Numbers; aggregate uncertainty; mixing;
Find related papers by JEL classification:
- C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
- E00 - Macroeconomics and Monetary Economics - - General - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-08 (All new papers)
- NEP-DGE-2008-03-08 (Dynamic General Equilibrium)
- NEP-GTH-2008-03-08 (Game Theory)
- NEP-MAC-2008-03-08 (Macroeconomics)
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