Retrospectives: The Origins of the Representative Agent

This paper examines Alfred Marshall's invention of the representative firm. Marshall first used the representative firm in order to describe an industry supply curve for an industry with heterogeneous firms. Despite Marshall's limited use of the notion, the representative agent was extensively criticized as an ephemeral, useless construct that was unable to account for economic growth and that ignored important heterogeneities. The criticisms succeeded in banishing the representative agent from economics. These initial criticisms are also shown to apply to modern uses of the representative agent as well.

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A Profit-Based Theory of Economic Growth and Upward Shift of Labor Supply Curve Implied by Phillips Curve

SSRN Electronic Journal ◽

10.2139/ssrn.3350938 ◽

2018 ◽

Author(s):

Yi Rui Wang

Keyword(s):

Economic Growth ◽

Labor Supply ◽

Phillips Curve ◽

Supply Curve ◽

Upward Shift

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The Paradoxical Fate of the Representative Firm

Journal of the History of Economic Thought ◽

10.1017/s1053837200002856 ◽

1999 ◽

Vol 21 (1) ◽

pp. 65-80 ◽

Cited By ~ 8

Author(s):

Frank Schohl

Keyword(s):

Economic Theory ◽

Business Cycle ◽

Business Cycle Theory ◽

Representative Agent ◽

Long Period ◽

Big Brother ◽

Analytical Tools ◽

Representative Firm

More than 100 years have passed since Alfred Marshall introduced the representative firm to economic theory in 1891. During this long period of time, many arguments have been raised giving either support or opposition to the concept. In recent years, macroeconomists have taken an increasing interest in the representative firm. Since the beginning of the modern microfoundations literature in the early 1970s, the representative firm and its big brother, the representative agent, have been made essential analytical tools for linking macroeconomics and microeconomics. Within this debate, the microfoundation of business cycle theory has played a prominent role.

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Equilibrium Technology Diffusion, Trade, and Growth

The American Economic Review ◽

10.1257/aer.20151645 ◽

2021 ◽

Vol 111 (1) ◽

pp. 73-128

Author(s):

Jesse Perla ◽

Christopher Tonetti ◽

Michael E. Waugh

Keyword(s):

Economic Growth ◽

Technology Adoption ◽

New Technologies ◽

Heterogeneous Firms ◽

Foreign Competition ◽

Welfare Gains ◽

Profit Distribution ◽

The Mean ◽

Welfare Gains From Trade ◽

Trade And Growth

We study how opening to trade affects economic growth in a model where heterogeneous firms can adopt new technologies already in use by other firms in their home country. We characterize the growth rate using a summary statistic of the profit distribution: the mean-min ratio. Opening to trade increases the profit spread through increased export opportunities and foreign competition, induces more rapid technology adoption, and generates faster growth. Quantitatively, these forces produce large welfare gains from trade by increasing an inefficiently low rate of technology adoption and economic growth. (JEL D21, D24, F14, F43, O33)

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Credit Constraints and Self-Fulfilling Business Cycles

American Economic Journal Macroeconomics ◽

10.1257/mac.6.1.32 ◽

2014 ◽

Vol 6 (1) ◽

pp. 32-69 ◽

Cited By ~ 31

Author(s):

Zheng Liu ◽

Pengfei Wang

Keyword(s):

Business Cycles ◽

Credit Constraints ◽

Heterogeneous Firms ◽

Increasing Returns ◽

Contract Enforcement ◽

Aggregate Productivity ◽

Representative Agent ◽

Equity Value ◽

Aggregate Dynamics

We argue that credit constraints not only amplify fundamental shocks, they can also lead to self-fulfilling business cycles. We study a model with heterogeneous firms, in which imperfect contract enforcement implies that productive firms face binding credit constraints, with the borrowing capacity limited by expected equity value. A drop in equity value tightens credit constraints and reallocates resources from productive to unproductive firms. Such reallocation reduces aggregate productivity, further depresses equity value, generating a financial multiplier. Aggregate dynamics are isomorphic to those in a representative-agent economy with increasing returns. For sufficiently tight credit constraints, the model generates self-fulfilling business cycles. (JEL E13, E32, E44)

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