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Can a Representative-Agent Model Represent a Heterogeneous-Agent Economy?

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  • Sungbae An

    (SMU)

  • Yongsung Chang
  • Sun-Bin Kim

Abstract

Accounting for observed fluctuations in aggregate employment, consumption, and real wage using the optimality conditions of a representative household requires preferences that are incompatible with economic priors. In order to reconcile theory with data, we construct a model with heterogeneous agents whose decisions are difficult to aggregate because of incomplete capital markets and the indivisible nature of labor supply. If we were to explain the model-generated aggregate time series using decisions of a stand-in household, such a household must have a non-concave or unstable utility as is often found with the aggregate U.S. data.

Suggested Citation

  • Sungbae An & Yongsung Chang & Sun-Bin Kim, 2008. "Can a Representative-Agent Model Represent a Heterogeneous-Agent Economy?," Microeconomics Working Papers 22056, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:microe:22056
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    References listed on IDEAS

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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Heterogeneity is crucial for business cycle models
      by Economic Logician in Economic Logic on 2009-01-27 16:22:00

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    Cited by:

    1. Emin Dinlersoz & Henry Hyatt & Hubert Janicki, 2019. "Who Works for Whom? Worker Sorting in a Model of Entrepreneurship with Heterogeneous Labor Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 244-266, October.
    2. Emin Dinlersoz & Henry Hyatt & Hubert Janicki, 2019. "Who Works for Whom? Worker Sorting in a Model of Entrepreneurship with Heterogeneous Labor Markets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 244-266, October.
    3. Yariv, Leeat & Jackson, Matthew O., 2018. "The Non-Existence of Representative Agents," CEPR Discussion Papers 13397, C.E.P.R. Discussion Papers.
    4. Chen, Huayi & Ma, Tieju, 2021. "Technology adoption and carbon emissions with dynamic trading among heterogeneous agents," Energy Economics, Elsevier, vol. 99(C).
    5. Jeong, Jaehun & Shim, Myungkyu, 2022. "On the welfare cost of business cycles: The role of labor-market heterogeneity," Journal of Macroeconomics, Elsevier, vol. 73(C).
    6. Sun-Bin Kim & Richard Rogerson & Yongsung Chang, 2012. "Hours and Employment in the Cross-Section and Over the Cycle," 2012 Meeting Papers 82, Society for Economic Dynamics.
    7. Yonsung Chang & Sun-Bin Kim & Kyooho Kwon, 2012. "Individual and Aggregate Labor Supply in a Heterogeneous Agent Economy with Intensive and Extensive Margins," Working papers 2012rwp-48, Yonsei University, Yonsei Economics Research Institute.
    8. Bechlioulis, Alexandros P. & Brissimis, Sophocles N., 2021. "Identifying key aspects of household behavior in a representative agent framework," Economic Modelling, Elsevier, vol. 97(C), pages 105-117.
    9. Chen, Huayi & Zhou, P., 2019. "Modeling systematic technology adoption: Can one calibrated representative agent represent heterogeneous agents?," Omega, Elsevier, vol. 89(C), pages 257-270.
    10. Sun-Bin Kim & Frank Schorfheide & Yongsung Chang, 2010. "Financial Frictions, Aggregation, and the Lucas Critique," 2010 Meeting Papers 31, Society for Economic Dynamics.
    11. Richard Rogerson, 2011. "Individual and Aggregate Labor Supply with Coordinated Working Times," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s1), pages 7-37, August.
    12. 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.
    13. Gallen, Trevor S., 2021. "Predicting and decomposing why representative agent and heterogeneous agent models sometimes diverge," Economic Modelling, Elsevier, vol. 101(C).
    14. 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.
    15. 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).
    16. 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.

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    More about this item

    Keywords

    Representative-Agent Model; Heterogeneous Agent; Macroeconomics;
    All these keywords.

    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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