Do we really need heterogeneous agent models? (original) (raw)
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Income and Wealth Distributions in a Population of Heterogeneous Agents
2014
This paper develops a simple framework to characterize the distribution of income and wealth in a real business cycle model. Agents are of two types depending on the human factor of production they own and they are located in separated markets, cities. In each city the two types of agent match to produce a composite factor, human service. We show that if the population is an exchangeable sequence of agents' types generated according to a Polya urn then (i) the share of agents' type follows a Beta distribution and (ii) the functional form of the matching function belongs to the family of the constant elasticity of substitution, with agent shares that depend on the composition of the population. We nest this structure into a standard Bewley economy, in which the aggregate supply of human service is combined with physical capital to produce the homogeneous output. Given the results (i)-(ii) we perform the exact aggregation of income, consumption and asset holding across agents,...
Allocation of Individual Risks in a Market Economy
2006
The ability to insure against idiosyncratic endowment risk depends on the organization of markets and the availability of consumption insurance. When all agents are identical ex ante and there are complete contingent claims, then full insurance can be achieved. Simple frictions, such as exogenous and endogenous borrowing constraints, liquidity constraints, or one-sided commitment, lead to partial insurance, implying richer dynamics for wealth accumulation and prices, and can potentially improve the asset pricing predictions of consumption-based asset pricing models. Yet, as Constantinides and Duffie point out, incorporating these frictions has not provided much improvement in the empirical performance of the mdoels. They argue for models with ex ante heterogeneity in which consumption insurance is limited. In the model studied here, agents are ex ante heterogeneous because they face different income distribution risks. The allocation of resources across the heterogeneous agents is d...
Recursive Competitive Equilibrium: The Case of Homogeneous Households
Econometrica, 1980
Recursive equilibrium theory is extended and generalized. Optimality of equilibria and supportability of optima are established in a direct way. Four economic applications are reformulated as recursive competitive equilibria and analyzed. 1. INTRODUCTION ONE WAY OF MODELLING dynamic uncertain economic phenomena is to use Arrow-Debreu general equilibrium structures and to search for optimal actions, conditional on the sequence of realizations of all past and present random variables or shocks. An alternative approach which is proving very useful in developing testable theories is to replace the attempt to locate equilibrium sequences of contingency functions with the search for equilibrium decision rules. These decision rules specify current action as a function of a limited number of "state variables" which summarize the effects of past decisions and current information. These equilibrium decision rules must be time invariant in order to apply standard time series methods and this necessitates a recursive structure. The purpose of this paper is to further the development of recursive competitive theory in the hope of facilitating its use in economics. In particular, we expect it to prove useful in explaining regularities in asset price movements and in the co-movements of economic aggregates, both of which have been the subject of extensive empirical research. Although our structure is a generalization of the one used by Lucas [12] in his model of capital asset pricing, our method of analysis is very different. As in his analysis, a homogeneous class of individuals is assumed; but, unlike his analysis, ours permits capital accumulation. This paper also subsumes the structure considered in Lucas and Prescott's [13] analysis of equilibrium investment under uncertainty. Optimality of recursive equilibria and supportability of Pareto optima by recursive equilibria is established in a simpler and more direct way which does not rely upon the equivalence of recursive and state-contingent equilibrium allocations. The homogeneity of consumers is admittedly not a realistic assumption for most applications. If all heterogeneous agents discount at the same rate and conditions are satisfied that insure Pareto optimality of a competitive equilibrium, the equilibrium processes for economic aggregates and prices will be observationally equivalent to those for some homogeneous consumer economy. Heterogeneity, of course, will typically necessitate the introduction of supplementary securities to allocate risk. 1We would like to acknowledge the helpful comments of Fischer Black,
Heterogeneous Households, the Distribution of Wealth, and the Laursen‐Metzler Effect*
Review of International Economics, 1995
T o study the effects of a terms-of-trade deterioration the paper constructs a dynamic model with heterogeneous households that maximize interternporal utility. It shows that insofar as this shock leads to a redistribution of wealth-an outcome ignored by the literature because of the representative-agent assumption invariably adopted-it may give rise to an initial current-account deficit and nonmonotonic adjustment paths. The paper also buttresses the argument that heterogeneous-household models help explain the observed "excess smoothness" of consumption.
Computational Economics, 2013
This paper describes an accurate, fast and robust fixed point method for computing the stationary wealth distributions in macroeconomic models with a continuum of infinitely-lived households who face idiosyncratic shocks with aggregate certainty. The household wealth evolution is modeled as a mixture Markov process and the stationary wealth distributions are obtained using eigen structures of transition matrices by enforcing the conditions for the Perron-Frobenius theorem by adding a perturbation constant to the Markov transition matrix. This step is utilized repeatedly within a binary search algorithm to find the equilibrium state of the system. The algorithm suggests an efficient and reliable framework for studying dynamic stochastic general equilibrium models with heterogeneous agents.
In this paper we explore the impact of demographic variables on the aggregate propensity to save, on the aggregate wealth-income ratio and on the inequality in the distribution of wealth, in the life cycle "egalitarian" model. We depart from and pioneering papers by assuming that the consumption level of the household is an increasing function of the number of its members. In this framework we show that in a stationary economy the timing of births strongly affects both the aggregate wealth-income ratio and the inequality of wealth distribution, and that the dispersion, within each household, of such a timing affects the inequality of wealth distribution only. In an economy with steadily growing population we show that the aggregate propensity to save is a decreasing function of the rate of growth of population when such a rate varies: i) due to changes in the timing of births or ii) due to changes in the number of children, provided that the age of parenthood is very low. As for inequality in the distribution of wealth, we show that it is a non-monotonic function of the timing of births and of the number of births per-household. The latter results, concerning the aggregate propensity to save and the inequality in the wealth distribution are in clear contrast with some of the fundamental propositions of the traditional life cycle theory. Classificazione JEL: D31, D91, J13.
Heterogeneity, Selection, and Wealth Dynamics
Annual Review of Economics, 2010
The market selection hypothesis states that, among expected utility maximizers, competitive markets select for agents with correct beliefs. In some economies this holds, while in others it fails. It holds in complete market economies with a common discount factor and bounded aggregate consumption. It can fail when markets are incomplete, when consumption grows too quickly, or when discount factors and beliefs are correlated. These insights have implication for the analysis of the heterogeneous agent stochastic dynamic general equilibrium models common in finance and macroeconomics.
Agent based models for wealth distribution with preference in interaction
Physica A: Statistical Mechanics and its Applications, 2014
We propose a set of conservative models in which agents exchange wealth with a preference in the choice of interacting agents in different ways. The common feature in all the models is that the temporary values of financial status of agents is a deciding factor for interaction. Other factors which may play important role are past interactions and wealth possessed by individuals. Wealth distribution, network properties and activity are the main quantities which have been studied. Evidence of phase transitions and other interesting features are presented. The results show that certain observations of real economic system can be reproduced by the models.
An agent-based model of the observed distribution of wealth in the United States
Journal of Economic Interaction and Coordination, 2017
Pareto cautiously asserted that the wealth and income distributions which bear his name are universal, basing his argument on observations of this distribution in many different types of economies. In this paper, we present an agent based model (and a scalable approximation of it) in a closely related spirit. The central feature of this model is that wealth enables an individual to secure more wealth. Specifically, the important and novel feature of this model is its ability to simultaneously produce both the Pareto distribution observed in empirical data for the top 10% of the population and the exponential distribution observed for the lower 90%. We show that the model produces these distributions of wealth when initialized with an equitable distribution.