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Can a Representative Agent Model Represent a Heterogeneous Agent Economy?

Author

Listed:
  • Sungbae An

    (Singapore Management University)

  • Yongsung Chang

    (University of Rochester and Seoul National University)

  • Sun-Bin Kim

    (Department of Economics, Korea University)

Abstract

Accounting for observed uctuations in aggregate employment, consumption, and real wage using optimality conditions of a representative household often requires preferences that are incompatible with economic priors (e.g., Mankiw, Rotemberg, and Summers, 1985). This discrepancy between the equilibrium model and the aggregate data is often viewed as evidence of the failure of labor-market clearing. We argue that such a conclusion is premature. We construct a model economy where all prices are exible and all markets clear at all times but household decisions are not readily aggregated because of incomplete capital markets and the indivisible nature of labor supply. We demonstrate that if we were to explain the model-generated aggregate time series using decisions of a "fictitious" stand-in household, such a household is likely to have a non-concave or unstable utility. Our analysis suggests that the representative agent model often fails to represent an equilibrium outcome of a heterogeneous agent economy.

Suggested Citation

  • Sungbae An & Yongsung Chang & Sun-Bin Kim, 2007. "Can a Representative Agent Model Represent a Heterogeneous Agent Economy?," Discussion Paper Series 0714, Institute of Economic Research, Korea University.
  • Handle: RePEc:iek:wpaper:0714
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    File URL: http://econ.korea.ac.kr/~ri/WorkingPapers/w0714.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Richard Rogerson, 2011. "Individual and Aggregate Labor Supply with Coordinated Working Times," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 7-37, August.
    2. Michael Keane & Richard Rogerson, 2015. "Reconciling Micro and Macro Labor Supply Elasticities: A Structural Perspective," Annual Review of Economics, Annual Reviews, vol. 7(1), pages 89-117, August.
    3. Alonso-Ortiz, Jorge & Rogerson, Richard, 2010. "Taxes, transfers and employment in an incomplete markets model," Journal of Monetary Economics, Elsevier, vol. 57(8), pages 949-958, November.
    4. Yongsung Chang & Sun-Bin Kim & Frank Schorfheide, 2010. "Labor-Market Heterogeneity, Aggregation, and the Lucas Critique," RCER Working Papers 556, University of Rochester - Center for Economic Research (RCER).
    5. Janicki, Hubert P., 2014. "The role of asset testing in public health insurance reform," Journal of Economic Dynamics and Control, Elsevier, vol. 44(C), pages 169-195.

    More about this item

    Keywords

    Representative agent model; Aggregation; Heterogeneity; Incomplete Markets; Indivisible Labor; GMM Estimation;

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • J21 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Force and Employment, Size, and Structure
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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