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

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Author: 
Sungbae An
Yongsung Chang
Sun-Bin Kim
Description: 
SMU ECONOMICS & STATISTICS WORKING PAPER SERIES Paper No. 14-2008
JEL codes: 
Organisation: 
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.
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