Quasi-linear preferences in the macroeconomy: Indeterminacy,heterogeneity and the representative consumer

We use aggregation theory to investigate the link between one-consumer and multi-consumer economies under a quasi-linear class of preferences. Our study is carried out in the context of the neoclassical growth model. The quasi-linear preferences considered are additive in consumption and leisure and linear in leisure. We first show that in a homogeneous agents economy, the individual hours worked are not uniquely determined. We then demonstrate that the indeterminacy can be resolved by introducing heterogeneity. For example, idiosyncratic shocks to productivities or imperfect substitutability of labor restore the uniqueness of equilibrium. As a special case, our analysis includes the indivisible labor model by Hansen (1985).JEL Classification: C73, D90, E21We are grateful to Morten Ravn for his guidance. We have benefited from the comments of an anonymous referee, Jordi Caballé, Finn Kydland, Franck Portier, Michael Reiter, Xavier Sala-i-Martin, William Schworm and Andrew Scott. Any remaining errors are ours. This research was supported by the Instituto Valenciano de Investigaciones Económicas and the Ministerio de Ciencia y Tecnología de España, the Ramón y Cajal program, and BEC 2001-0535.