Gorman Heterogeneous Households
Gorman Heterogeneous Households
This chapter describes methods for computing equilibria of economies with consumers who have heterogeneous preferences and endowments. It adopts simplifications that facilitate coping with heterogeneity. In the present chapter, consumers differ only with respect to their endowments and the processes {bt} that disturb their preferences. It assumes that consumers have a common information set that includes observations on past values of the economy-wide capital stocks and the common exogenous state variables that drive each of the individual preference shock processes and the technology shock process {dt}. Preferences of individual consumers can be aggregated by summing both preference shocks and initial endowments across consumers, thereby forming a representative consumer. All aggregate aspects of a competitive equilibrium can be computed by forming the representative consumer and proceeding as in Chapter 7. The chapter shows how to calculate individual allocations by using the demand functions described in Chapter 9.3.
Keywords: heterogeneous households, consumer preferences, endowments, allocation, economic equilibrium
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