Preferences and the Dynamic Representative Consumer

Abstract

This paper provides families of time-separable, twice continuously differentiable, and strictly concave utility functions of a group of consumers that are both sufficient and necessary in order to have linear aggregation in a single-commodity-type deterministic dynamic environment, in the presence of consumer wealth-, labor-productivity, and preference heterogeneity, for alternative settings where the rates of time preference can be the same or different across consumers. The employed concept of linear aggregation pertains the existence of a representative consumer with a time-separable utility function. It is proved that when the rates of time preference are choice-independent and heterogeneous across consumers, a representative consumer exists if, and only if, the momentary utility functions of all consumers are exponential. Results are also provided for, (i) common across consumers choice-independent rates of time preference, and, (ii) heterogeneous choice-dependent rates of time preference, and compared with previously identified sufficient conditions for aggregation in the existing literature.

Keywords: Heterogeneity, linear aggregation, representative consumer

JEL Classification: D11, D31, D91