5
$\begingroup$

I've read several texts stating that with a complete market assumption, there's always a representative agent lurking. How is it that by assuming complete markets, we're able to prove the existence of a representative agent?

What's the connection between both?

Any help would be appreciated.

$\endgroup$
  • $\begingroup$ do you mean like the representative firm and representative consumer in classic macroeconomic models? $\endgroup$ – EconJohn Nov 12 '17 at 4:27
  • $\begingroup$ @EconJohn yes, I do. $\endgroup$ – An old man in the sea. Nov 12 '17 at 8:07
1
$\begingroup$

It depends on what you want from a representative agent. What you get is a representative agent at the given prices. For any two commodities, you have relative prices. This is where market completeness comes in. All you have to do now is find a well-behaved utility function whose marginal rate of substitution between the commodities corresponds to the relative prices. You can even take the utility function to be linear: $$u(x_1,x_2,\ldots,x_l)=\sum_{i=1}^l x_i/p_i.$$ Of course, the resulting "representative agent" is utterly useless for any comparative statics exercise or any welfare analysis.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.