Block-recursive equilibria in heterogeneous-agent models

Abstract

Equilibrium models with heterogeneous agents and aggregate uncertainty are difficult to analyze since policy functions and market prices usually depend on the cross-sectional distribution over agents' state variables which is a high-dimensional object. This paper considers a general model framework in which this curse of dimensionality does not arise because equilibrium prices are determined by market entry conditions and are independent of the cross-sectional distribution (block-recursive equilibrium). The paper first establishes existence and ergodic theorems which are useful for the theoretical analysis and numerical implementation of block-recursive equilibria. Then these results are applied to models of firm dynamics with competitive or frictional input markets and to incomplete-market economies with endogenous asset market participation.