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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.

MSC:
91B26Market models (auctions, bargaining, bidding, selling, etc.)
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References:
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