ACTIVE INTERMEDIATION IN OVERLAPPING GENERATIONS ECONOMIES WITH PRODUCTION AND UNSECURED DEBT

Mark Pingle () and Leigh Tesfatsion ()

Macroeconomic Dynamics, 1998, vol. 2, issue 2, 183-212

Abstract: It is well known that the first welfare theorem can fail for overlapping generations economies with private production and unsecured debt. This paper demonstrates that the reason for this failure is that intermediation is modeled as a purely passive coordination activity implemented by a Walrasian Auctioneer. When intermediation is modeled instead as a contestable activity carried out by a corporate intermediary owned by consumer-shareholders and operated in their interest, every equilibrium is Pareto efficient. In broader terms, these findings caution that the inefficiency observed in standard modelings of overlapping generations economies may not be the reflection of an intrinsic market failure. Rather, the observed inefficiency could instead be due to a fundamental incompleteness in the model specification — the presumed inability of private agents to exploit the earnings opportunities associated with incurring and forever rolling over debt.

Date: 1998
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Working Paper: Active Intermediation in Overlapping Generations Economies with Production and Unsecured Debt (1998)
Working Paper: Active Intermediation in Overlapping Generations Economies with Production and Unsecured Debt (1998)
Working Paper: Active Intermediation in Overlapping Generations Economies with Production and Unsecured Debt (1998)
Working Paper: Active Intermediation in Overlapping Generations Economies with Production and Unsecured Debt (1997)
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