Working Paper BETA #2001-04

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Title : Modeling Behavioral Heterogeneity in Demand Theory

Author(s) : Isabelle MARET

Abstract : This paper is a first step in answering B. Villemeur's (1998,1999) and Hildenbrand's (1998) criticism of the notions of behavioral heterogeneity introduced in demand theory by Grandmont (1992) and Kneip (1999). As in the Grandmont-Kneip approach, we define a notion of behavioral heterogeneity such that if the population is sufficiently heterogeneous, the aggregate budget share function is proved to become insensitive to changes in prices and income. However, in contrast to the aforementioned literature, this insensitivity in the aggregate is not explained by any insensitivity property at the microeconomic level, but rather by a ``balancing effect'' : For any commodity, the negative effect on market budget share induced after a change in prices or income by individuals who decrease their budget share is compensated by the existence of individuals who increase their budget share.

Key-words : Aggregation; Behavioral heterogeneity; Large economy; Balancing effect; Insensitivity of maket budge

JEL Classification : D11; D12; D30