Aggregate Efficiency with Heterogeneous Agents

We study aggregate efficiency when households have heterogeneous preferences and outcomes. Our measure extends cost-benefit analysis and aggregate TFP to general equilibrium settings with heterogeneous households and potentially restricted redistribution tools. We ask what fraction of resources can be saved while keeping every agent at least as well off as in their status-quo allocation. We show how to convert this problem into an equivalent utility-maximization problem, enabling the use of tools and results normally applicable only in representative agent settings. We characterize changes in aggregate efficiency in terms of observables, like expenditures and price elasticities, and apply our results to study, among other things, the effects of productivity shocks, the costs of misallocation, and the effects of trade shocks, both with and without costly redistribution.