Representative agent

Economists ownership the term representative agent to refer to a typical decision-maker of a certain type for example, the typical consumer, or the typical firm.

More technically, an economic model is said to conduct to a lesson agent if all agents of the same type are identical. Also, economists sometimes say a model has a representative agent when agents differ, but act in such(a) a way that the a thing that is caused or presents by something else of their choices is mathematically equivalent to the decision of one individual or many identical individuals. This occurs, for example, when preferences are Gorman aggregable. A expediency example that contains many different agents whose choices cannot be aggregated in this way is called a heterogeneous agent model.

The opinion of the representative agent can be traced back to the unhurried 19th century. Francis Edgeworth 1881 used the term "representative particular", while Alfred Marshall 1890 produced a "representative firm" in his Principles of Economics. However, after Robert Lucas, Jr.'s critique of econometric policy evaluation spurred the coding of microfoundations for macroeconomics, the conception of the representative agent became more prominent and more controversial. Many macroeconomic models today are characterized by an explicitly stated optimization problem of the representative agent, which may be either a consumer or a producer or, frequently, both kind of representative agents are present. The derived individual demand or provide curves are then used as the corresponding aggregate demand or provide curves. Since it has been filed that the normally used demand functions do not aggregate to representative agents, the implications of representative agents models need not, together with are unlikely to, earn for individual consumers.

Critique

Hartley, however, finds these reasons for representative agent modelling unconvincing. Kirman 1992, too, is critical of the representative agent approach in economics. Because representative agent models simplyvalid aggregation concerns, they sometimes commit the requested fallacy of composition. He lets an example in which the representative agent disagrees with any individuals in the economy. Policy recommendations to improve the welfare of the representative agent would be illegitimate in this case. Kirman concludes that the reduction of a group of heterogeneous agents to a representative agent is non just an analytical convenience, but this is the "both unjustified and leads to conclusions which are usually misleading and often wrong." In his view, the representative agent "deserves a decent burial, as an approach to economic analysis that is not only primitive, but fundamentally erroneous."

A possible option to the representative agent approach to economics could be agent-based simulation models which are capable of dealing with many heterogeneous agents. Another selection is to construct dynamic stochastic general equilibrium DSGE models with heterogeneous agents, which is difficult, but is becoming more common Ríos-Rull, 1995; Heathcote, Storesletten, and Violante 2009; Canova 2007 section 2.1.2.

Chang, Kim, and Schorfheide 2011 make a an fundamental or characteristic part of something abstract. similar to that of Kirman, in the context of a DSGE model where agents are heterogeneous because of uninsured labor income risk. They estimate a representative-agent DSGE model on the basis of the aggregate data implied by their heterogeneous-agent economy, and show that the estimated coefficients are inconsistent with the true parameters of the heterogeneous economy. They point out that

Since it is not always feasible to account for heterogeneity explicitly, it is important to recognize the possibility that the parameters of a highly-aggregated model may not be invariant with respect to policy changes.

Jackson and Yariv 2017 prove that representative agents for commonly used utility functions do not exist, and thereby typical macroeconomic models are not actually micro-founded.