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Assessing Aggregate Tests of Efficiency for Dynamic Economies

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Author Info

  • Barbie Martin

    ()
    (Universität Karlsruhe)

  • Hagedorn Marcus

    ()
    (University of Bonn)

  • Kaul Ashok

    ()
    (Universitat Pompeu Fabra)

Abstract

In a seminal contribution Abel, Mankiw, Summers, and Zeckhauser (1989) show that from an aggregate dynamic perspective the US economy is Pareto efficient. We argue that, when applying their test, they implicitly make strong assumptions about the economy's future behavior. We show how time series evidence may easily lead to wrong conclusions about the welfare properties of real world economies.We present a test criterion based on Zilcha (1991) and robust evidence that the US economy does not overaccumulate capital. Our contribution highlights that the distinction between efficient capital accumulation and Pareto efficiency is empirically relevant. The latter efficiency benchmark - encompassing also risk sharing issues - cannot be rigorously tested based on available approaches in the literature.

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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 4 (2004)
Issue (Month): 1 (December)
Pages: 1-17

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Handle: RePEc:bpj:bejmac:v:topics.4:y:2004:i:1:n:16

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Web page: http://www.degruyter.com

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Cited by:
  1. Gaetano Bloise & Pietro Reichlin, 2008. "Asset Prices, Debt Constraints and Inefficiency," EIEF Working Papers Series 0803, Einaudi Institute for Economics and Finance (EIEF), revised Mar 2008.
  2. Sebastian Rausch & Thomas Rutherford, 2010. "Computation of Equilibria in OLG Models with Many Heterogeneous Households," Computational Economics, Society for Computational Economics, vol. 36(2), pages 171-189, August.
  3. Torben M. Andersen & Joydeep Bhattacharya, 2009. "Unfunded pensions and endogenous labor supply," Economics Working Papers 2009-16, School of Economics and Management, University of Aarhus.
  4. Chattopadhyay, Subir, 2008. "The Cass criterion, the net dividend criterion, and optimality," Journal of Economic Theory, Elsevier, vol. 139(1), pages 335-352, March.
  5. Martin Barbie & Ashok Kaul, 2009. "The Zilcha criteria for dynamic inefficiency reconsidered," Economic Theory, Springer, vol. 40(2), pages 339-348, August.

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