The Representative Consumer in the Neoclassical Growth Model with Idiosyncratic Shocks

This paper studies a complete-market version of the neoclassical growth model, where agents face idiosyncratic shocks to eearnings. We show that if agents possess identical preferences of either the CRRA or the addilog type, then the heterogeneous-agent economy behaves as if there was a representative consumer who faces three kinds of shocks: to preferences, to technology and to labor. We calibrate and simulate the constructed representative-consumer models. We find that idiosyncratic uncertainty can have a non-negligible effect on aggregate labor-market fluctuations. (Copyright: Elsevier)