Hence there is a discrepancy between the true preferences of agents and the
preferences of the hypothetical representative consumer genera'tin s aggregate
fluctuations. In particular, the second of these has preferences linear in n,
indicating a higher dasticity of labor supply.
Hansen (1985) has shown that this feature has implications .~hieh are
empirically relevant. Whereas many other individuals have found that movements
in aggregate hours are too small relative to movements in reai wages of
productivity, Hansen's indivisible labor economy delivers too much mevemmt
in aggregate hours relative to real wages and productivity. It is important to
know that the results of this paper do net depend critically upon the
assumption of identical agents. It may be thought that having all agents
simultaneously being indifferent between working and not working is what
causes the large response in employment relative to productivity. A paranietric
example is offered to illustrate that heterogeneity need not affect the results of
this paper. The important feature of the example is that each ag¢ut has a
different reservation wage. Consider the following specification: there is a
continuum of agents with total mass equal to one. Each agent has a utility
function of the form