Accounting for Household Heterogeneity in General Equilibrium Models

The paper investigates differences in total consumption and demand according to how heterogeneity is incorporated into the model of the general equilibrium type. The sensitivity analysis for a static case with CES utilities and production functions demonstrates that the relative differences in total consumption can be considerable when a model with several heterogeneous consumer groups is compared to the one with a representative consumer. In a dynamic model, investment is proved to depend both on the production and consumption sides even in the case with one-sector production. By using the first-order optimality conditions to the multi-sector case it is shown that a model has enough capability to represent household heterogeneity to be applied for integrated assessment of carbon cycle emissions and energy demand.

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