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Predicting and decomposing why representative agent and heterogeneous agent models sometimes diverge

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  • Gallen, Trevor S.

Abstract

Heterogeneous agent (HA) and representative agent (RA) models often give very different answers to important economic questions, even when studying the same phenomenon with the otherwise identical assumptions. There are a variety of reasons why HA and RA models may differ. This paper provides a formula that can be used to decompose the different response functions of HA and RA models into six major “mechanical” categories. Because solving HA models is costly, researchers using this formula are better able to predict when an HA model is unlikely to improve upon an RA model, and defend their use of an RA model without first solving the HA model. Moreover, when two models do diverge, this paper provides a framework for understanding mechanically why they diverged.

Suggested Citation

  • Gallen, Trevor S., 2021. "Predicting and decomposing why representative agent and heterogeneous agent models sometimes diverge," Economic Modelling, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:ecmode:v:101:y:2021:i:c:s0264999321001176
    DOI: 10.1016/j.econmod.2021.105528
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    More about this item

    Keywords

    Heterogeneous agent; Representative agent; Population heterogeneity; Labor supply;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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