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Zbl 0963.91051
Den Haan, W.J.
The importance of the number of different agents in a heterogeneous asset-pricing model. (English)
[J] J. Econ. Dyn. Control 25, No.5, 721-746 (2001). ISSN 0165-1889

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 2000:: *91B26 Market models

Keywords: heterogeneous agents; incomplete markets; asset-pricing model

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