Heterogeneous agents vs. Representative agents

Economics requires assumptions about the composition of aggregates, such as products, consumers & producers in a daily market. These aggregates are composed of many diverse goods, individuals or firms. Humans and human institutions have agency, i.e. choice, and can be assumed to follow common rules of behaviour as consumers or producers. However, there is a crucial difference between assuming that all the agents are diverse (heterogeneous, perhaps following a normal or other distribution) or identical (representative of the average). Diversity is an inherent feature of people and firms, according to age, culture, tastes, abilities, experience, and is essential for evolution and well being. However, the alternative assumption of identical representative agents makes modelling behaviour tractable and this assumption has become the basis of most neoclassical macroeconomic analysis, making it potentially misleading.

Relevant papers:

Critique of representative agent assumption is (Kirman, 1992)

Critique  of representative agent assumption in DSGE modelling (Colander et al, 2009)

References:

Kirman, Alan (1992) “Whom or What Does the Representative Individual Represent?” The Journal of Economic Perspectives, 6(2): 7-36

Colander, David, Peter Howitt, Alan Kirman, Axel Leijonhufvud, and Perry Mehrling. 2008. “Beyond DSGE Models: Toward an Empirically Based Macroeconomics.” American Economic Review, 98 (2): 236-40. DOI: 10.1257/aer.98.2.236

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