Transformation of the commodity space, behavioral heterogeneity and the aggregation problem
Aggregation in exchange markets is studied by imposing restrictions on distributions of the households' characteristics. Approximate bounds for market demand price elasticities that depend upon specific measures of behavioral heterogeneity are provided. Increasing behavioral heterogeneity makes aggregate expenditures more independent of prices. This has strong consequences for the prevalence, in the aggregate, of the weak axiom of revealed preference, of gross substitutability, and on uniqueness and stability of the Walrasian exchange equilibrium. These strong macroeconomic regularities are obtained essentially through distributional assumptions, as no “rationality” requirements are imposed on individual demand functions, other than homogeneity and Walras' Law.
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