Agent (economics)
An agent in economics is simply an actor who makes decisions within a model of some aspect of the economy. Every such agent solves either a well-defined or ill-defined optimization problem to reach a choice. This core definition strips away human complexity to focus on the mechanics of decision making. Models use this concept to predict how individuals respond to changing conditions. The term applies broadly across microeconomic and macroeconomic frameworks without restriction.
Buyers and sellers serve as two common types of agents in partial equilibrium models of a single market. Macroeconomic models often distinguish households, firms, and governments or central banks as main types of agents. These entities may play multiple roles simultaneously within the same economic framework. Households might act as consumers while also functioning as workers or voters in a specific model. Some advanced macroeconomic models differentiate even further between workers and shoppers or commercial banks.
The term agent takes on a specific meaning when used in relation to principal, agent models. In this context it refers strictly to someone delegated to act on behalf of a principal. This setup creates a situation where one party must trust another to execute tasks. Delegation conflicts arise when the interests of the principal diverge from those of the agent. Economists study these relationships to understand how contracts can align incentives effectively.
Agent-based computational economics uses corresponding agents that are computational objects modeled as interacting according to rules over space and time. These objects are not real people but programmed simulations designed to mimic behavior. The rules are formulated to model social interactions based on stipulated incentives and information. The concept allows for any persistent individual, social, biological, or physical entity to interact with others. Such dynamic multi-agent systems help researchers observe emergent patterns without human variables.
An economic model assuming all agents of a given type are exactly identical is called a representative agent model. Economists often use these models to describe the economy in the simplest terms possible. A model which recognizes differences among agents is instead called a heterogeneous agent model. Differences in age become necessary considerations when studying the economic effects of pensions. Wealth heterogeneity proves essential when analyzing precautionary saving or redistributive taxation strategies.
Common questions
What is an agent in economics?
An agent in economics is simply an actor who makes decisions within a model of some aspect of the economy. Every such agent solves either a well-defined or ill-defined optimization problem to reach a choice.
Who are the common types of agents in macroeconomic models?
Macroeconomic models often distinguish households, firms, and governments or central banks as main types of agents. These entities may play multiple roles simultaneously within the same economic framework.
How does principal agent theory define an agent?
In principal agent models it refers strictly to someone delegated to act on behalf of a principal. This setup creates a situation where one party must trust another to execute tasks.
What is agent based computational economics?
Agent based computational economics uses corresponding agents that are computational objects modeled as interacting according to rules over space and time. These objects are not real people but programmed simulations designed to mimic behavior.
When do economists use representative agent models versus heterogeneous agent models?
An economic model assuming all agents of a given type are exactly identical is called a representative agent model. A model which recognizes differences among agents is instead called a heterogeneous agent model.
All sources
8 references cited across the entry
- 1journalEquilibrium in a pure currency economyRobert Jr. Lucas — 1980
- 2journalLiquidity, loanable funds, and real activityTimothy S. Fuerst — 1992
- 3bookThe New Palgrave: A Dictionary of EconomicsJoseph E. Stiglitz — 1987
- 4bookThe New Palgrave Dictionary of EconomicsScott E. Page — 2008
- 5bookFrontiers of Business Cycle TheoryJosé-Víctor Ríos-Rull — Princeton University Press — 1995
- 6journalSimulating Fundamental Tax Reform in the United StatesDavid Altig et al. — 2001
- 7journalBuffer-Stock Saving and the Life Cycle/Permanent Income HypothesisChristopher Carroll — 1997