Book contents
17 - Overlapping generations models
Published online by Cambridge University Press: 01 June 2010
Summary
In this chapter, we study the overlapping generations model of Samuelson [381]. The main feature of this model is that an agent “lives” for two periods: in the first period, he has a non-trivial decision on how much to save and how much to consume, and in the second and final period, he consumes all of his wealth so that the second-period decision is trivial. Each time period, a new generation enters into trading so that there are always two types of agents – young and old. The overlapping generations model has a special type of friction – because of the physical environment, agents are unable to commit to certain transactions over time. Bilateral borrowing and lending arrangements are not available because of incomplete participation. We have other models in which the physical environment precludes bilateral transactions over time, namely the Townsend turnpike model with east and west traveling agents (see Townsend [431]). In the terminology of Kocherlakota [280], these environments are characterized by agents that are “… unable to commit themselves to a particular allocation of resources” (p. 233). The overlapping generations model also has the property that allocations can be dynamically inefficient, implying that a reallocation of resources would make some agents better off and no agent worse off. The dynamic inefficiency arises because there is a double infinity of agents and time periods, according to Shell [397]. We explore the implications of dynamic efficiency in the overlapping generations model.
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- Asset Pricing for Dynamic Economies , pp. 504 - 546Publisher: Cambridge University PressPrint publication year: 2008