Factor proportionality in multiple households closed CGE models: theory and illustrations

Abstract

The factor contents of different consumers' consumption bundles computed from a country's CGE model with multiple households are seen to be proportional or almost proportional in the case of four different countries, namely USA, Brazil, Spain and Ivory Coast. These countries have been chosen because of the existence for these countries of CGE models with multiple households (by opposition to a representative consumer) and good quality data. This study has been limited to these four countries because we thought that the implications for CGE modeling of our findings should not delay any further their publication even though further studies are obviously needed. Taken as a law, we show that proportionality of factor contents at equilibrium for all endowment vectors and fixed preferences implies that households' implicit preferences for factor contents are identical and homothetic. Another consequence is that factor and goods equilibrium prices are unique and depend only on total factor resources, not on the distribution of these factors between households. Factor proportionality may therefore be at the root of the puzzling rigidity and uniqueness of equilibrium prices of goods and factors observed in CGE models with multiple households.