Complete Markets Aggregation
Complete Markets Aggregation
This chapter outlines a setting with heterogeneity among households' preferences of a kind that violates the conditions for Gorman aggregation. Households' Engel curves are still affine, but dispersion of their slopes prevents Gorman aggregation. However, there is another sense in which there is a representative household whose preferences are a peculiar kind of average over the preferences of different types of households. The chapter shows how to compute and interpret this preference ordering over economy-wide aggregate consumption. This complete markets aggregate preference ordering cannot be computed until one knows the distribution of wealth evaluated at equilibrium prices, so it is less useful than the one produced by Gorman aggregation.
Keywords: heterogeneous households, household preferences, Gorman aggregation, Engel curves, aggregate consumption
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