Choosing Longevity with Overlapping Generations: To Be or Not to Be in Diamond's Model
Chen Weichun (),
Merwan Engineer () and
Ian King ()
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Chen Weichun: University of Victoria
The B.E. Journal of Macroeconomics, 2008, vol. 8, issue 1, 1-39
We extend Diamond's (1965) OLG model to allow agents to choose whether to participate in the second period of life. The valuation of early exit (x) is a key parameter. We characterize competitive equilibria, efficient allocations, and predictions for income and life expectancy over time. We find that, with logarithmic utility, for any value of x, there is a range of initial values of the capital stock for which some agents would prefer to exit in equilibrium. The shape of the transition function and the number of steady state equilibria depend crucially on the value of capital's share of income.
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