Is Representative Agent a Good Proxy to Individuals: An Example of Ramsey Model

Abstract

In most of the macroeconomic models, the concept of representative agent is adopted. The aggregate economy is a simple combination of a large amount of these identical agents. Individuals are thought to have no power in influencing the performance of aggregate economy, especially the prices in the market. We argue in this paper that by considering the interactions between agents with tools of differential game theory, the "consistent" equilibrium is different from what we derived before under the framework of Ramsey model. We show that the agents have the incentives to influence the economy. The power of influence is tiny for each one but significant in aggregate.