The Representative Agent of an Economy with External Habit-Formation and Heterogeneous Risk-Aversion

For the first time in the literature, we derive an analytic expression for the representative agent of a fairly general class of economies populated by agents with catching up with the Joneses preferences, but with heterogeneous risk-aversion. As Chan and Kogan (2002) show numerically, the representative agent has stochastic risk-aversion that moves counter-cyclically with the state variable. However, we show that the heterogeneity of risk-aversion is unlikely to be able to explain the empirical regularities - namely the variability of the Sharpe ratio - that Campbell and Cochrane (1999) explain in a model of a representative agent with stochastic risk-aversion