A representative individual from Arrovian aggregation of parametric individual utilities

Abstract

Abstract This article investigates the representative-agent hypothesis for a population which faces a collective choice from a given finite-dimensional space of alternatives. Each individual’s preference ordering is assumed to admit a utility representation through an element of an exogenously given set of admissible utility functions. In addition, we assume that (i) the class of admissible utility functions allows for a smooth parametrization and only consists of strictly concave functions, (ii) the population is infinite, and (iii) the social welfare function satisfies Arrovian rationality axioms. We prove that there exists an admissible utility function r, called representative utility function, such that any alternative which maximizes r also maximizes the social welfare function. Given the structural similarities among the admissible utility functions (due to parametrization), we argue that the representative utility function can be interpreted as belonging to an – actual or invisible– individual. The existence proof for the representative utility function utilizes a special nonstandard model of the reals, viz. the ultrapower of the reals with respect to the ultrafilter of decisive coalitions; this construction explicitly determines the parameter vector of the representative utility function.