Optimality in an OLG model with nonsmooth preferences

Eisei Ohtaki

No e145, Working Papers from Tokyo Center for Economic Research

Abstract: It is a well-known observation that, in the overlapping generations (OLG) model with the complete market, we can judge optimality of an equilibrium allocation by examining the associated equilibrium price. Motivated by recent remarkable development in decision theory under ambiguity, this study reexamines the above observation in a stochastic OLG model with convex but not necessarily smooth preferences. It is shown that, under such preferences, optimality of an equilibrium allocation depends on the set of possible supporting prices, not necessarily on the associated equilibrium price itself. Therefore, observations of an equilibrium price do not necessarily tell us precise information on optimality of the equilibrium allocation.

Pages: 42 pages
Date: 2020-01
New Economics Papers: this item is included in nep-dge
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Journal Article: Optimality in an OLG model with nonsmooth preferences (2023)
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