Ulric B. and Evelyn L. Bray Social Sciences Seminar

Abstract: This paper revisits a classical question in economics: how individual preferences and incomes shape aggregate behavior. We develop a method that reduces the hard problem of aggregation to simply computing a weighted average. The method applies to populations with homothetic preferences. The key idea is to handle aggregation in the space of logarithmic expenditure functions.

We demonstrate the power of this method by (i) characterizing classes of preferences invariant with respect to aggregation, i.e., such that any population of heterogeneous consumers with preferences from the class behaves as if it were a single aggregate consumer from the same class; (ii) characterizing classes of aggregate preferences generated by popular preference domains such as linear or Leontief; (iii) describing indecomposable preferences, i.e., those that do not correspond to aggregate behavior of any non-trivial population; (iv) representing any preference as an aggregation of indecomposable ones.

We discuss connections and applications of our findings to stochastic discrete choice, information design, welfare analysis and gains from trade estimation, pseudo-market mechanisms, and preference identification.

Joint work with Philip Ushchev (ECARES, Universite libre de Bruxelles)

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