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Microfoundations are the microeconomic behaviours of individual agents, like households or businesses, on which an economic theory is based. Research in microfoundations explores the link between macroeconomic and microeconomic principles in order to explore the aggregate relationships in macroeconomic models.

During recent decades, macroeconomists have attempted to combine microeconomic models of individual behaviour to derive the relationships between macroeconomic variables. Presently, many macroeconomic models, representing different theories, are derived by aggregating microeconomic models, allowing economists to test them with both macroeconomic and microeconomic data. However, microfoundations research is still heavily debated with management, strategy and organization scholars having varying views on the "micro-macro" link. The study of microfoundations is gaining popularity even outside the field of economics, recent development includes operation management and project studies

History
The microfoundations project originiated in the post-Second World War neoclassical synthesis where it is generally believed that neoclassical microeconomics fused with Keynesian macroeconomics. The ‘neoclassical microeconomics’ in mention is the Marshallian partial-equilibrium approach, which emerged from the Walrasian general equilibrium theory. However, the Walrasian general equilibrium theory presents another trend as it attempts to theorise the economy as a whole and is viewed as an alternative to macroeconomics. This approach is considered to be the trigger for exploring microfoundations, with the solution being deemed as DSGE modelling with representative agents. However, the notion of a gap in the “micro-macro” link has been and continues to be explored in various theories and models.

Critics of the Keynesian theory of macroeconomics argued that some of Keynes' assumptions were inconsistent with standard microeconomics. For example, Milton Friedman's microeconomic theory of consumption over time (the 'permanent income hypothesis') suggested that the marginal propensity to consume (the increase of consumer spending with increased income) due to temporary income, which is crucial for the Keynesian multiplier, was likely to be much smaller than Keynesians assumed. For this reason, many empirical studies have attempted to measure the marginal propensity to consume, and macroeconomists have also studied alternative microeconomic models (such as models of credit market imperfections and precautionary saving) that might imply a greater marginal propensity to consume.

One particularly influential endorsement of the study of microfoundations was Robert Lucas, Jr.'s critique of traditional macroeconometric forecasting models. After the apparent shift of the Phillips curve relationship during the 1970s, Lucas argued that the correlations between aggregate variables observed in macroeconomic data would tend to change whenever macroeconomic policy changed. This implied that microfounded models are more appropriate for predicting the effect of policy changes, using the assumption that changes of macroeconomic policy do not alter the microeconomics of the macroeconomy.

Importance
It is suggested that modern mainstream economics is based entirely on DSGE models. Therefore, the importance of microfoundations lies in its synonymous relationship with DSGE, with DSGE models being built on microeconomic foundations.

The Smets-Wouters model is one example of the importance of microfoundations as it is regarded as a benchmark model for analysing monetary and fiscal policy. The model offers three main advantages of microfoundations:

1.    They provide a modelling structure where data may not be very informative.

2.    They avoid the Lucas Critique as they are able to relate the reduced-form parameters to deeper structural parameters.

3.    They provide a basis for estimating the optimality and desirability of policy.

"Micro" and "Macro" Research
Specialization in the management and organizational sciences has led to a divide between “macro” and “micro” areas. Research in macro management mainly focuses on the organizational or firm level, while research in micro areas mainly examines individual and group levels within organizations. For example, macro research domains typically include strategic management and organization theory, whereas micro includes areas such as organizational behaviour and human resource management. Most early macroeconomic models, including early Keynesian models, were based on hypotheses about relationships between aggregate quantities, such as aggregate production, employment, consumption, and investment. Critics and proponents of these models disagreed as to whether these aggregate relationships were consistent with the principles of microeconomics. There, bridging these two domains continues to be a topic of debate for organizational, management and strategy scholars. As a result, microfoundations has become a topic of greater interest to researchers as it explores how micro and macro areas connect.

The Microfoundations Project
The microfoundations project was developed with the basis that if macroeconomics is associated with aggregate economic models, and microeconomics is associated with the individual behaviours of households and firms, microfoundations was taken to be the demand that macroeconomic models have microeconomic foundations. Therefore, microfoundations research focuses on the influences of individual actions and interactions on firm heterogeneity. As stated by Felin and Foss (2005), “organizations are made up of individuals, and there is no organization without individuals”. Thus, the specific level of the microfoundations project is the individual level as it focuses on this elementary truth. However, microfoundations

Assumptions
There are two assumptions that the microfoundations project rests upon:


 * 1) Firsty, it is possible to establish empircially adequate theory of indiviual behaviour.
 * 2) Secondly, the theory can be transformed into a theory of the economy using aggregation procedures, without having to make any substantive assumptions about the economy.

Controversy
Some, such as Alan Kirman and S. Abu Turab Rizvi, argue on the basis of the Sonnenschein–Mantel–Debreu theorem that the microfoundations project has failed.

Jackson and Leelat (2017) show that representative agents do not exist for most commonly used demand functions. As a consequence, welfare implications based on representative agent models need not hold for individuals in an economy.

This further implies that current macroeconomic models based on representative agents are not factually micro-founded. Much of the contemporary macroeconomic research, therefore, is not based on simple representative agents, but they often allow for rich heterogeneity of agents' behavior.[improper synthesis?]