Robustness of Multiple Equilibria in OLG Economies

Guido Cazzavillan () and Patrick Pintus ()

Review of Economic Dynamics, 2004, vol. 7, issue 2, pages 456-475

Abstract: This paper extends the standard Diamond's two-period OLG model of capital accumulation by introducing labor-leisure choice into the first-period of agents' life. Under the assumption of gross substitutability, we show that multiple intertemporal equilibria require both highly complementary inputs and a low fraction of consumption out of wage income by the young generation. On the contrary, if capital and labor are sufficiently substitutable, or if young agents consume a realistically large proportion of their wage income, multiple intertemporal equilibria and, therefore, endogenous fluctuations driven by self-fulfilling beliefs, are ruled out. We further illustrate, in contrast with the related literature, that intertemporal substitution in consumption across periods is a critical mechanism which enables short-lived agents to arbitrage away expectationally driven fluctuations when the ratio between saving and wage is reasonably low. As a result, the OLG model's predictions are substantially similar to the usual optimal growth model. (Copyright: Elsevier)

Keywords: overlapping generations; endogenous labor supply; gross substitutability; multiple equilibria; endogenous fluctuations. (search for similar items in EconPapers)
JEL-codes: E32 C62 (search for similar items in EconPapers)
Date: 2004
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