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Nonrepresentative Representative Consumers

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  • Michael Jerison

Abstract

Single consumer models are often used to focus attention on economic efficiency, leaving aside equity considerations. In general, these ¡°representative consumer" models do not accurately portray the effects of changes in policies, endowments or technology in the multi-consumer economies they are meant to represent; but even when they do, they are not necessarily adequate for evaluating efficiency. The representative consumer can be Pareto inconsistent, preferring a situation B to A even though all the consumers in the represented economy prefer A to B. It is not clear from the literature how serious a defect this can be. The known examples of Pareto inconsistency are not robust. Small changes in the consumers' preferences remove the Pareto inconsistency. It has been an open question whether large robust Pareto inconsistencies are possible. This paper shows that they are. In one example, the actual consumers require 56% more income than the representative consumer requires in order to be compensated for the doubling of a price. But such large Pareto inconsistencies require that there is a Giffen good for the representative consumer. We argue that the inconsistencies of representative consumers in most macroeconomic applications are likely to be small and we give conditions ruling out inconsistencies entirely.

Suggested Citation

  • Michael Jerison, 2006. "Nonrepresentative Representative Consumers," Discussion Papers 06-08, University at Albany, SUNY, Department of Economics.
  • Handle: RePEc:nya:albaec:06-08
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    File URL: http://www.albany.edu/economics/research/workingp/2006/nonr.pdf
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    Cited by:

    1. JÊrÆme B. Detemple & Piero Gottardi, 1998. "Aggregation, efficiency and mutual fund separation in incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(2), pages 443-455.
    2. Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
    3. Alan Kirman, 2016. "Complexity and Economic Policy: A Paradigm Shift or a Change in Perspective? A Review Essay on David Colander and Roland Kupers's Complexity and the Art of Public Policy," Journal of Economic Literature, American Economic Association, vol. 54(2), pages 534-572, June.
    4. Chiappori, Pierre-André, 2005. "Conférence François-Albert-Angers 2004," L'Actualité Economique, Société Canadienne de Science Economique, vol. 81(3), pages 405-419, Septembre.
    5. Edward E. Schlee, 2001. "The Value of Information in Efficient Risk-Sharing Arrangements," American Economic Review, American Economic Association, vol. 91(3), pages 509-524, June.
    6. Jerison, Michael, 1997. "Nonrepresentative representative consumers," UC3M Working papers. Economics 4137, Universidad Carlos III de Madrid. Departamento de Economía.

    More about this item

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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