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Near-Rational Equilibria in Heterogeneous-Agent Models: A Verification Method

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  • Leonid Kogan
  • Indrajit Mitra

Abstract

We propose a general simulation-based procedure for estimating the quality of approximate policies in heterogeneous-agent equilibrium models, which allows us to verify that such approximate solutions describe a near-rational equilibrium. Our procedure endows agents with superior knowledge of the future path of the economy, while imposing a suitable penalty for such foresight. The relaxed problem is more tractable than the original, and results in an upper bound on agents’ welfare. Our method applies to various solution algorithms. We illustrate our approach in two applications: the incomplete-markets model of Krusell and Smith (1998) and the heterogeneous firm model of Khan and Thomas (2008).

Suggested Citation

  • Leonid Kogan & Indrajit Mitra, 2025. "Near-Rational Equilibria in Heterogeneous-Agent Models: A Verification Method," The Review of Financial Studies, Society for Financial Studies, vol. 38(8), pages 2227-2274.
    • Handle: RePEc:oup:rfinst:v:38:y:2025:i:8:p:2227-2274.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaf030
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    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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