Self-Aware Transport of Heterogeneous Agents in Incomplete Markets

The present paper was prompted by the surprising discovery that the common strategy, adopted in a large body of research, for producing time-invariant equilibrium in the classical Aiyagari-Bewley-Huggett model fails to achieve its objective in a widely cited benchmark study, with the implication that, contrary to the common belief, a central problem in macroeconomics has been without an adequate solution, save for special cases. It is shown that equilibria in such models can be obtained generically only if prices, optimal policy, and population distribution are allowed to adjust toward their steady-state regimes simultaneously, which requires new modeling and computational tools. By expanding the approach proposed by Dumas and Lyasoff [11] the paper provides such tools and offers a new interpretation of problems commonly stated as mean field games or transportation of mass problems. The scope of the approximate aggregation conjecture of Krusell and Smith [19] is clarified and a new analytical technique for models with common noise is developed. The proposed new method does not resort on the representative agent framework, does not involve simulation, does not postulate infinite time horizon, and allows for disparity in the cross-section of households to be accounted for.Comment: 50 pages, 16 figure