Representative agent

Economists use the term representative agent to refer to the typical decision-maker of a certain type (for example, the typical consumer, or the typical firm).

More technically, an economic model is said to have a representative agent if all agents of the same type are identical. Also, economists sometimes say a model has a representative agent when agents differ, but act in such a way that the sum of their choices is mathematically equivalent to the decision of one individual or many identical individuals. This occurs, for example, when preferences are Gorman aggregable. A model that contains many different agents whose choices cannot be aggregated in this way is called a heterogeneous agent model.

The notion of the representative agent can be traced back to the late 19th century. Francis Edgeworth (1881) used the term "representative particular", while Alfred Marshall (1890) introduced a "representative firm" in his Principles of Economics. However, after Robert Lucas, Jr.'s critique of econometric policy evaluation spurred the development of microfoundations for macroeconomics, the notion of the representative agent became more prominent and more controversial. Many macroeconomic models today are characterized by an explicitly stated optimization problem of the representative agent, which may be either a consumer or a producer (or, frequently, both types of representative agents are present). The derived individual demand or supply curves are then used as the corresponding aggregate demand or supply curves.

When economists study a representative agent, this is because it is usually simpler to consider to one 'typical' decision maker instead of simultaneously analyzing many different decisions. Of course, economists must abandon the representative agent assumption when differences between individuals are central to the question at hand. For example, a macroeconomist might analyze the impact of a rise of oil prices on a typical 'representative' consumer; but some analyses of auctions involve heterogeneous agent models because competing potential buyers can value the good differently.

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