Near-Rational Equilibria in Heterogeneous-Agent Models: A Verification Method

39 Pages Posted: 7 Oct 2019

See all articles by Leonid Kogan

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Indrajit Mitra

University of Michigan, Stephen M. Ross School of Business

Date Written: October 7, 2019

Abstract

We propose a simulation-based procedure for evaluating approximation accuracy of numerical solutions of general equilibrium models with heterogeneous agents. We measure the approximation accuracy by the magnitude of the welfare loss suffered by agents from following sub-optimal policies. Our procedure allows agents to have knowledge of the future paths of the economy under suitably imposed costs of foresight. This method is general, straightforward to implement, and can be used in conjunction with various solution algorithms. We illustrate our method in two contexts: the incomplete-markets model of Krusell and Smith (1998) and the heterogeneous firm model of Khan and Thomas (2008).

Keywords: Heterogenous Agent Economies, Equilibrium Solution, Heuristic Methods

JEL Classification: E10, E20, E30, G12, C68

Suggested Citation

Kogan, Leonid and Mitra, Indrajit, Near-Rational Equilibria in Heterogeneous-Agent Models: A Verification Method (October 7, 2019). Available at SSRN: https://ssrn.com/abstract=3465120 or http://dx.doi.org/10.2139/ssrn.3465120

Leonid Kogan

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-636
Cambridge, MA 02142
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617-253-2289 (Phone)
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HOME PAGE: http://web.mit.edu/lkogan2/www/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Indrajit Mitra (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

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