The importance of the number of different agents in a heterogeneous asset-pricing model. (English) Zbl 0963.91051

Summary: Models with heterogeneous agents and incomplete markets often only have two types of agents to limit the computational complexity. The question arises whether equilibrium models with a realistic number of types have the same implications as models with a small number of types. In the asset-pricing model considered in this paper, several properties depend crucially on the number of types. For example, in the economy with only two types interest rates respond to ‘idiosyncratic’ income shocks which makes it easier to smooth consumption. Moreover these effects can be so strong that it is possible that a relaxation of the borrowing constraint reduces an agent’s utility. Average interest rates on the other hand are not very sensitive to the number of types.


91B26 Auctions, bargaining, bidding and selling, and other market models
Full Text: DOI


[1] Aiyagari, S.R, Uninsured idiosyncratic risk and aggregate saving, Quarterly journal of economics, 109, 659-684, (1994)
[2] Aiyagari, S.R; Gertler, M, Asset returns with transactions costs and uninsured individual risk, Journal of monetary economics, 27, 311-332, (1991)
[3] Bernanke, B; Gertler, M; Gilchrist, S, The financial accelerator and the flight to quality, Review of economics and statistics, 78, 1-15, (1996)
[4] Carroll, C.D; Kimball, M.S, On the concavity of the consumption function, Econometrica, 64, 981-992, (1996) · Zbl 0856.90035
[5] Deaton, A, Saving and liquidity constraints, Econometrica, 59, 1221-1248, (1991)
[6] Den Haan, W.J, Heterogeneity, aggregate uncertainty, and the short-term interest rate, Journal of business and economic statistics, 14, 399-411, (1996)
[7] Den Haan, W.J, Solving dynamic models with aggregate shocks and heterogeneous agents, Macroeconomic dynamics, 1, 355-386, (1997) · Zbl 0918.90025
[8] Duffie, D; Geanakoplos, J; Mas-Colell, A; McLennan, A, Stationary Markov equilibria, Econometrica, 62, 745-782, (1994) · Zbl 0829.90018
[9] Gaspar, J; Judd, K.L, Solving large-scale rational-expectations models, Macroeconomic dynamics, 1, 45-75, (1997) · Zbl 0915.90057
[10] Heaton, J; Lucas, D.J, The effects of incomplete insurance markets and trading costs in a consumption-based asset pricing model, Journal of economic dynamics and control, 6, 601-620, (1992)
[11] Heaton, J; Lucas, D.J, Evaluating the effects of incomplete markets on risk sharing and asset pricing, Journal of political economy, 104, 433-487, (1996)
[12] Jaffee, D; Stiglitz, J, Credit rationing, (), 838-888
[13] Judd, K.L., Kubler, F., Schmedders, K., 1998. Incomplete markets with heterogeneous tastes and idiosyncratic income. Manuscript, Hoover Institution, Stanford University, Stanford.
[14] Krusell, P; Smith, A.A, Income and wealth heterogeneity, portfolio choice, and equilibrium asset returns, Macroeconomic dynamics, 1, 387-422, (1997) · Zbl 0915.90060
[15] Krusell, P; Smith, A.A, Income and wealth heterogeneity in the macroeconomy, Journal of political economy, 106, 867-896, (1998)
[16] Levine, D.K, Infinite horizon equilibrium with incomplete markets, Journal of mathematical economics, 18, 357-376, (1989) · Zbl 0689.90019
[17] Levine, D.K; Zame, W.R, Debt constraints and equilibrium in infinite horizon economies with incomplete markets, Journal of mathematical economics, 26, 103-131, (1993) · Zbl 0868.90022
[18] Lucas, D.J, Asset pricing with undiversifiable income risk and short sales constraints: deepening the equity premium puzzle, Journal of monetary economics, 34, 325-342, (1994)
[19] Magill, M; Quinzii, M, Infinite horizon incomplete markets, Econometrica, 62, 853-880, (1994) · Zbl 0807.90022
[20] Marcet, A; Singleton, K.J, Equilibrium asset prices and savings of heterogeneous agents in the presence of incomplete markets and portfolio constraints, Macroeconomic dynamics, 3, 243-277, (1999) · Zbl 0939.91084
[21] Pischke, J.-S, Individual income, incomplete information, and aggregate consumption, Econometrica, 63, 805-840, (1995) · Zbl 0836.90052
[22] Rios-Rull, J.-V, Life-cycle economies and aggregate fluctuations, Review of economic studies, 63, 465-490, (1996) · Zbl 0855.90021
[23] Rios-Rull, J.-V., 1997. Computation of equilibria in heterogeneous agent models. Federal Reserve Bank of Minneapolis Staff Report 231.
[24] Telmer, C.I, Asset-pricing puzzles with undiversifiable labor income risk, Journal of finance, 48, 1803-1832, (1993)
[25] Wang, C, Dynamic insurance with private information and balanced budgets, Review of economic studies, 62, 577-596, (1995) · Zbl 0847.90038
[26] Weil, P, Equilibrium asset prices with undiversifiable labor income risk, Journal of economic dynamics and control, 6, 769-790, (1992) · Zbl 0825.90162
[27] Zhang, H.H., 2000. Explaining bond returns in heterogeneous agent models: the importance of higher-order moments, Journal of Economic Dynamics and Control, forthcoming. · Zbl 0968.91023
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. It attempts to reflect the references listed in the original paper as accurately as possible without claiming the completeness or perfect precision of the matching.