Heterogeneity in capital and skills in a neoclassical stochastic growth models

Does a heterogeneous agents version of a neoclassical model with labor-leisure choice replicate the distributions of consumption and working hours observed in the cross-sectional data? Does incorporating heterogeneity enhance the aggregate performance of the representative agent model? We address these questions in a complete market model economy with two sources of heterogeneity: initial endowments and non-acquired skills. We find positive answers to both questions. (C) 2001 Elsevier Science B.V. All rights reserved.