Dynamic Suboptimality of Competitive Equilibrium in Multiperiod Overlapping Generations Economies

Espen R. Henriksen and Stephen Spear ()

No 2005-E37, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: The question we ask is: within the set of a three-period-lived OLG economies with a stochastic endowment process, a stochastic dividend process, and sequentially complete markets, under what set of conditions may a set of government transfers dynamically Pareto dominate the laissez faire equilibrium? We start by characterizing perfect risk sharing and find that it implies a strongly stationary set of state-dependent consumption claims. We also derive the stochastic equivalent of the deterministic steady-state by steady-state optimal marginal rate of substitution. We show then that the risk sharing of the recursive competitive laissez faire equilibrium of any overlapping generations economy with weakly more than three generations is non-stationary and that risk is suboptimally shared. We then show that we can construct a sequence of consumption allocations that only depends on the exogenous state and which Pareto dominate the laissez faire allocations in an ex interim as well as ex ante sense. We also redefine conditional Pareto optimality to apply within this framework and show that under a broad set of conditions, there also exists a sequence of allocations that dominates the laissez faire equilibrium in this sense. Finally, we apply these tools and results to an economy where the endowment is constant, but where fertility is stochastic, i.e. the number of newborn individuals who enters the economy follows a Markov Process.

New Economics Papers: this item is included in nep-dge and nep-mac

Downloads: (external link)
http://littlehurt.gsia.cmu.edu/gsiadoc/WP/2005-E37.pdf

Related works:
Working Paper: Dynamic Suboptimality of Competitive Equilibrium in Multiperiod Overlapping Generations Economies (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:cmu:gsiawp:1114116336

Ordering information: This working paper can be ordered from
http://server1.tepper.cmu.edu/gsiadoc/GSIA_WP.asp

Access Statistics for this paper

More papers in GSIA Working Papers from Carnegie Mellon University, Tepper School of Business
Address: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
Series data maintained by Steve Spear ().