Behavioral biases and the representative agent


In this note, we consider an economy with heterogeneous agents, differing by their time preference rate and by their beliefs. We show that at the Pareto optimum, the representative agent exhibits interesting behavioral properties. More precisely, starting from a standard model with expected utility maximizers and exponential discounting, but allowing for heterogeneity among agentsí beliefs and time preference rates, we obtain at the representative agent level an inverse S-shaped probability distribution weighting function and hyperbolic discounting. We provide possible interpretation and applications for this result.ou

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Last time updated on 09/07/2019

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