The authors examine the following paradox: in a dynamic setting, equilibria can be radically different in a model with a finite number of agents than in a model with a continuum of agents. They present a simple strategic setting in which this paradox is a general phenomenon. However, the paradox...

Two modifications are introduced into the standard real-business-cycle model: habit preferences and a two-sector technology with limited intersectoral factor mobility. The model is consistent with the observed mean risk-free rate, equity premium, and Sharpe ratio on equity. In addition, its...