Heterogeneity in economics: Difference between revisions

In [[economic theory]] and [[econometrics]], the term '''heterogeneity''' refers to differences across the units being studied. For example, a [[macroeconomic model]] in which consumers are assumed to differ from one another is said to have '''heterogeneous agents.''', which is contrasted with the case of a [[representative agent]] model in which all consumers are assumed to be identical.

In [[econometrics]], statistical inferences may be erroneous if, in addition to the observed variables under study, there exist other relevant variables that are unobserved, but correlated with the observed variables; dependent and independent variables .<ref>M. Arellano (2003), ''[https://books.google.com/books?id=LoDnCwAAQBAJ&q=heterogeneity Panel Data Econometrics]'', Chapter 2, 'Unobserved heterogeneity', pp. 7-31. Oxford University Press.</ref>

[[Economic model]]s are often simplifiedformulated by assumingmeans thatof alla [[Agentrepresentative (economics)|agentsagent]]. (decisionDepending makers)on arethe identical;application, thisindividual isagents oftencan calledbe aggregated to or represented by a single agent. For example, individual demand can be aggregated to market demand if and only if individual preferences are of the [[representativeGorman agentpolar form]] assumption(or equivalently satisfy linear and parallel [[Engel curve]]s). Under this condition, even heterogeneous preferences can be represented by a single aggregate agent simply by summing over individual demand to market demand. However, some questions in economic theory cannot be accurately addressed without considering differences across agents, requiring a '''heterogeneous agent model'''.

How to solve a heterogeneous agent model depends on the assumptions that are made about the expectations of the agents in the model. Broadly speaking, models with heterogeneous agents fall into the category of [[Agent-Based Computational Economics|agent-based computational economics]] (ACE) if the agents have [[adaptive expectations]] (see [[artificial financial market]]), or into the category of [[dynamic stochastic general equilibrium]] (DSGE) if the agents have [[rational expectations]]. DSGE models with heterogeneneous agents are especially difficult to solve, and have only recently become a widespread topic of research; most early DSGE research instead focused on representative agent models.

[[Category:EconomicsComputational modelseconomics]]