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American Economic Journal: Macroeconomics: Vol. 1 No. 2 (July 2009)

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

Article Citation

An, Sungbae, Yongsung Chang, and Sun-Bin Kim. 2009. "Can a Representative-Agent Model Represent a Heterogeneous-Agent Economy." American Economic Journal: Macroeconomics, 1(2): 29-54.

DOI: 10.1257/mac.1.2.29

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 nonconcave or unstable utility as is often found with the aggregate US data. (JEL E13, E24)

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Authors

An, Sungbae (Singapore Management U)
Chang, Yongsung (U Rochester and Yonsei U)
Kim, Sun-Bin (Korea U)

JEL Classifications

E24: Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital
E13: General Aggregative Models: Neoclassical

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