Accounting for Household Heterogeneity in General Equilibrium Models

Melnikov, N.B., O'Neill, B.C., & Dalton, M.G. (2009). Accounting for Household Heterogeneity in General Equilibrium Models. IIASA Interim Report. IIASA, Laxenburg, Austria: IR-09-051

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Abstract

The paper investigates differences in total consumption and demand according to how heterogeneity is incorporated into the model of the general equilibrium type. The sensitivity analysis for a static case with CES utilities and production functions demonstrates that the relative differences in total consumption can be considerable when a model with several heterogeneous consumer groups is compared to the one with a representative consumer. In a dynamic model, investment is proved to depend both on the production and consumption sides even in the case with one-sector production. By using the first-order optimality conditions to the multi-sector case it is shown that a model has enough capability to represent household heterogeneity to be applied for integrated assessment of carbon cycle emissions and energy demand.

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