Accounting for household heterogeneity in general equilibrium economic growth models

We describe and evaluate a new method of aggregating heterogeneous households that allows for the representation of changing demographic composition in a multi-sector economic growth model. The method is based on a utility and labor supply calibration that takes into account time variations in demographic characteristics of the population. We test the method using the Population-Environment-Technology (PET) model by comparing energy and emissions projections employing the aggregate representation of households to projections representing different household types explicitly. Results show that the difference between the two approaches in terms of total demand for energy and consumption goods is negligible for a wide range of model parameters. Our approach allows the effects of population aging, urbanization, and other forms of compositional change on energy demand and CO2 emissions to be estimated and compared in a computationally manageable manner using a representative household under assumptions and functional forms that are standard in economic growth models.

► A novel household aggregation method in multi-sector growth models is described. ► Utility and labor supply are calibrated to take into account time variations. ► Use of time-dependent labor supply relative to fixed labor supply has a major effect. ► Aggregation to single and multiple household groups is compared. ► The difference in results between single and multiple household groups is negligible.