Agent (economics)

Agent (economics)

Overview
In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, an agent is an actor
Actor
An actor is a person who acts in a dramatic production and who works in film, television, theatre, or radio in that capacity...

 and decision maker in a model
Mathematical model
A mathematical model is a description of a system using mathematical concepts and language. The process of developing a mathematical model is termed mathematical modeling. Mathematical models are used not only in the natural sciences and engineering disciplines A mathematical model is a...

. Typically, every agent makes decisions by solving a well or ill defined optimization
Optimization (mathematics)
In mathematics, computational science, or management science, mathematical optimization refers to the selection of a best element from some set of available alternatives....

/choice problem. The term agent can also be seen as equivalent to player
Player (game)
A player of a game is a participant therein. The term 'player' is used with this same meaning both in game theory and in ordinary recreational games....

in game theory
Game theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...

.

For example, buyers and sellers are two common types of agents in partial equilibrium
Partial equilibrium
Partial equilibrium is a condition of economic equilibrium which takes into consideration only a part of the market, ceteris paribus, to attain equilibrium....

 models of a single market. Macroeconomic models, especially dynamic stochastic general equilibrium
Dynamic stochastic general equilibrium
Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics...

 models that are explicitly based on microfoundations
Microfoundations
In economics, the term microfoundations refers to the microeconomic analysis of the behavior of individual agents such as households or firms that underpins a macroeconomic theory....

, often distinguish household
Household
The household is "the basic residential unit in which economic production, consumption, inheritance, child rearing, and shelter are organized and carried out"; [the household] "may or may not be synonymous with family"....

s, firms, and government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

s or central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

s as the main types of agents in the economy.
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Encyclopedia
In economics
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

, an agent is an actor
Actor
An actor is a person who acts in a dramatic production and who works in film, television, theatre, or radio in that capacity...

 and decision maker in a model
Mathematical model
A mathematical model is a description of a system using mathematical concepts and language. The process of developing a mathematical model is termed mathematical modeling. Mathematical models are used not only in the natural sciences and engineering disciplines A mathematical model is a...

. Typically, every agent makes decisions by solving a well or ill defined optimization
Optimization (mathematics)
In mathematics, computational science, or management science, mathematical optimization refers to the selection of a best element from some set of available alternatives....

/choice problem. The term agent can also be seen as equivalent to player
Player (game)
A player of a game is a participant therein. The term 'player' is used with this same meaning both in game theory and in ordinary recreational games....

in game theory
Game theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...

.

For example, buyers and sellers are two common types of agents in partial equilibrium
Partial equilibrium
Partial equilibrium is a condition of economic equilibrium which takes into consideration only a part of the market, ceteris paribus, to attain equilibrium....

 models of a single market. Macroeconomic models, especially dynamic stochastic general equilibrium
Dynamic stochastic general equilibrium
Dynamic stochastic general equilibrium modeling is a branch of applied general equilibrium theory that is influential in contemporary macroeconomics...

 models that are explicitly based on microfoundations
Microfoundations
In economics, the term microfoundations refers to the microeconomic analysis of the behavior of individual agents such as households or firms that underpins a macroeconomic theory....

, often distinguish household
Household
The household is "the basic residential unit in which economic production, consumption, inheritance, child rearing, and shelter are organized and carried out"; [the household] "may or may not be synonymous with family"....

s, firms, and government
Government
Government refers to the legislators, administrators, and arbitrators in the administrative bureaucracy who control a state at a given time, and to the system of government by which they are organized...

s or central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...

s as the main types of agents in the economy. Each of these agents may play multiple roles in the economy; households, for example, might act as consumers, as workers, and as voters in the model. Some macroeconomic models distinguish even more types of agents, such as workers and shoppers or commercial banks.

The term agent is also used in relation to principal–agent models; in this case it refers specifically to someone delegated to act on behalf of a principal
Principal (law)
In commercial law, a principal is a person, legal or natural, who authorizes an agent to act to create one or more legal relationships with a third party...

.

In Agent-based computational economics
Agent-Based Computational Economics
Agent-based computational economics is the major aspect of computational economics that studies economic processes, including whole economies, as dynamic systems of interacting agents. As such, it falls in paradigm of complex adaptive systems...

, the concept of an agent has been more broadly interpreted to be any persistent individual, social, biological, or physical entity interacting with other such entities within the context of a dynamic multi-agent economic system.

Representative vs. heterogenous agents


An economic model
Model (economics)
In economics, a model is a theoretical construct that represents economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified framework designed to illustrate complex processes, often but not always using...

 in which all agents of a given type (such as all consumers, or all firms) are assumed to be exactly identical is called a representative agent
Representative agent
Economists use the term representative agent to refer to the typical decision-maker of a certain type ....

 model. A model which recognizes differences among agents is called a heterogeneous agent model. Economists often use representative agent models when they want to describe the economy in the simplest terms possible. In contrast, they may be obliged to use heterogeneous agent models when differences among agents are directly relevant for the question at hand. For example, considering heterogeneity in age is likely to be necessary in a model used to study the economic effects of pensions; considering heterogeneity in wealth is likely to be necessary in a model used to study precautionary saving or redistributive taxation.