The purpose of this paper is to infer the welfare of heterogeneous agents using a representative agent model.
It does so by partitioning the household into subunits and allocating consumption to each subunit proportionally to the income the subunit generates through wages and capital returns.
The author shows that for a simple dynamic general equilibrium model with immigration, the steady state utilities of these subunits correspond very closely to the utilities for an equivalent heterogeneous agent model. This is particularly true when labor–leisure decisions are made using slightly modified Euler equations.
More complicated models can be solved and simulated using fewer computational resources using this technique.
Phillips, K.L. (2019), "Heterogeneous utility from a representative agent model: immigrants vs non-immigrants", Journal of Economic Studies, Vol. 46 No. 7, pp. 1309-1318. https://doi.org/10.1108/JES-04-2018-0144
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