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The Importance Of The Number Of Different Agents In A Heterogeneous Asset-Pricing Model

  • Wouter J. Denhaan

    (UCSD)

In this paper, I compare a two-agent asset-pricing model with the corresponding model with a continuum of agents. In a two-agent economy, interest rates respond to idiosyncratic income shocks because each agent represents half of the population. These interest rate effects facilitate consumption smoothing. An agent in a two-agent economy, however, can never lend more than the other agent is allowed to borrow, which prevents him from building a buffer stock of assets. For most parameter values, the first effect is more important. For some parameter values, the interest rate effects in the two-agent economy are so strong that a relaxation of the borrowing constraint reduces an agent's utility.In contrast to these differences, I find that for most parameter values there are no large differences in average interest rates across the two types of economies. In addition, I analyze the business cycle behavior of interest rates in an incomplete markets economy with a continuum of agents. The dynamic response of interest rates to aggregate shocks is a lot more complicated than the response in a complete markets economy and the magnitude of the response is bigger.

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2000 with number 349.

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Date of creation: 05 Jul 2000
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Handle: RePEc:sce:scecf0:349
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CEF 2000, Departament d'Economia i Empresa, Universitat Pompeu Fabra, Ramon Trias Fargas, 25,27, 08005, Barcelona, Spain

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