This project will develop macro models with heterogeneity across people and firms to understand the consequences of two profound macro trends: the economic transformation of China and the rising cross-sectional inequality in many countries. The ultimate aim is to help these models become everyday tools in macro, development/labor economics, and actual policy making.Inequality and human capital accumulation is an important theme. I will develop tractable models of the equity-efficiency tradeoffs under risk and imperfect financial markets. Due to novel general equilibrium effects, progressive taxation is particularly distortive for education choices. This calls for complementary policies. I also explore the nexus between inequality and aggregate risk, the interaction between inequality and the dynamics of political conflict, and the puzzling success of the Scandinavian welfare model.The project will provide sharper tools for policy analysis. A key aim is to integrate models of mistakes into structural macro models. While such models generally assume rationality, welfare programs are often geared to precisely address negative consequences of human errors. Assuming information is costly, I will quantify bounds on rationality to match observed behavior. The framework has a wide range of potential uses. I will use it to reevaluate government programs.A large part of the project focuses on China. The rapid economic transformation of emerging economies has raised many new questions for economic theory and policy. I will marshal the use of models with heterogeneity to address these issues. A key goal is to develop a quantitative structural model that can become the benchmark model of fiscal policy analysis and long-run forecasts in China. As an application, I will study cost and gains of various redistribution programs. The project also aims at examining the sources of growth and inflation in China and, ultimately, understanding the culprit of the Chinese growth miracle.