Working Paper: CEPR ID: DP13397
Authors: Matthew O. Jackson; Leeat Yariv
Abstract: We characterize environments in which there exists a representative agent: an agent who inherits the structure of preferences of the population that she represents. The existence of such a representative agent imposes strong restrictions on individual utility functions, requiring them to be linear in the allocation and additively separable in any parameter that characterizes agents' preferences (e.g., a risk aversion parameter, a discount factor, etc.). Commonly used classes of utility functions (exponentially discounted utility functions, CRRA or CARA utility functions, logarithmic functions, etc.) do not admit a representative agent.
Keywords: representative agents; preference aggregation; revealed preference; collective decisions
JEL Codes: D72; D71; D03; D11; E24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Existence of a representative agent (D84) | Strong restrictions on individual utility functions (D11) |
| Strong restrictions on individual utility functions (D11) | Utility functions must be linear in allocation and additively separable in parameters (D11) |
| Commonly used utility functions (CRRA, CARA, logarithmic) (D11) | Do not allow for a representative agent (D79) |
| CRRA utility functions (D11) | Representative agent's utility cannot maintain constant relative risk aversion unless all agents have identical risk aversion parameters (D11) |
| Only parameterized classes of utility functions that are separable in agents' utility parameters (D11) | Can admit a representative agent when consumption is common (D10) |
| When consumption is private (D10) | Requirements become more demanding for admitting a representative agent (D79) |
| Commonly used utility functions in economic modeling (C51) | Do not satisfy the necessary restrictions for the existence of a representative agent (D52) |