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A characterization of inefficiency in stochastic overlapping generations economies

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Author Info
Bloise, Gaetano
Calciano, Filippo L.

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Abstract

In this paper, we provide a characterization of interim inefficiency in stochastic economies of overlapping generations. With respect to the established body of results in the literature, we allow for sequentially incomplete markets and we remove the hypothesis of two-period horizons, by considering longer, though uniformly bounded, horizons for generations. The characterization exploits a suitably Modified Cass Criterion, based entirely on observable prices and independent of the length of the horizons of generations. For sequentially incomplete markets, we introduce a notion of unambiguous inefficiency, separating the inefficient intertemporal allocation of resources from incomplete risk-sharing. Unambiguous inefficiency reduces to inefficiency when markets are sequentially complete. Furthermore, our analysis shows that the hypothesis of two-period horizons is purely heuristic in establishing a criterion for inefficiency.

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Publisher Info
Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 143 (2008)
Issue (Month): 1 (November)
Pages: 442-468
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Handle: RePEc:eee:jetheo:v:143:y:2008:i:1:p:442-468

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Web page: http://www.elsevier.com/locate/inca/622869

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Related research
Keywords: Stochastic overlapping generations economies Inefficiency Competitive prices Cass Criterion Social security Incomplete markets;

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References listed on IDEAS
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  1. Rao Aiyagari, S. & Peled, Dan, 1991. "Dominant root characterization of Pareto optimality and the existence of optimal equilibria in stochastic overlapping generations models," Journal of Economic Theory, Elsevier, vol. 54(1), pages 69-83, June. [Downloadable!] (restricted)
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  1. Gaetano Bloise & Pietro Reichlin, 2008. "Asset Prices, Debt Constraints And Inefficiency," Departmental Working Papers of Economics - University 'Roma Tre' 0089, Department of Economics - University Roma Tre. [Downloadable!]
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