Representative and Heterogeneous Agents: Theory and Evidence

Abstract

This paper analyzes the theoretical and empirical findings for representative and heterogeneous agents for a host of economic issues including market completeness, consumption growth variability, income risk, equilibrium interest rate, and welfare gains from eliminating a Real Business Cycle (RBC). We introduce three types of heterogeneity: state, preferences, and beliefs and show that in some cases the heterogeneous agent framework can be viewed as complementary to the representative agent, whereas in other cases it can be seen as a substitute.