Near-Rational Equilibria in Heterogeneous-Agent Models: A Verification Method
We propose a general simulation-based procedure for estimating quality of approximate policies in heterogeneous-agent equilibrium models, which allows to verify that such approximate solutions describe a near-rational equilibrium. Our procedure endows agents with superior knowledge of the future path of the economy, while imposing a suitable penalty for such foresight. The relaxed problem is more tractable than the original, and results in an upper bound on agents’ welfare. Our method applies to various solution algorithms. We illustrate our approach in two applications: the incomplete-markets model of Krusell and Smith (1998) and the heterogeneous firm model of Khan and Thomas (2008).
-
-
Copy CitationLeonid Kogan and Indrajit Mitra, "Near-Rational Equilibria in Heterogeneous-Agent Models: A Verification Method," NBER Working Paper 30111 (2022), https://doi.org/10.3386/w30111.Download Citation
-
Published Versions
Leonid Kogan & Indrajit Mitra & Stefano Giglio, 2025. "Near-Rational Equilibria in Heterogeneous-Agent Models: A Verification Method," The Review of Financial Studies, vol 38(8), pages 2227-2274.
More from the NBER
In addition to working papers, the NBER disseminates affiliates’ latest findings through a range of free periodicals—the NBER Reporter, the NBER Digest, the Bulletin on Health, the Bulletin on the Economics of Alzheimer's, and the Bulletin on Entrepreneurship—as well as research spotlights, lectures, and panel videos.
