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Robustness of Multiple Equilibria in OLG Economies

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Author Info
Guido Cazzavillan (Universita Ca' Foscari di Venezia)
Patrick A. Pintus (Universite de la Mediterranee Aix-Marseilles II)

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Abstract

This paper extends the standard Diamond's two-period OLG model of capital accumulation by introducing labor-leisure choice into the first-period of agents' life. Under the assumption of gross substitutability, we show that multiple intertemporal equilibria require both highly complementary inputs and a low fraction of consumption out of wage income by the young generation. On the contrary, if capital and labor are sufficiently substitutable, or if young agents consume a realistically large proportion of their wage income, multiple intertemporal equilibria and, therefore, endogenous fluctuations driven by self-fulfilling beliefs, are ruled out. We further illustrate, in contrast with the related literature, that intertemporal substitution in consumption across periods is a critical mechanism which enables short-lived agents to arbitrage away expectationally driven fluctuations when the ratio between saving and wage is reasonably low. As a result, the OLG model's predictions are substantially similar to the usual optimal growth model. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2003.10.001
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Publisher Info
Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 7 (2004)
Issue (Month): 2 (April)
Pages: 456-475
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Handle: RePEc:red:issued:v:7:y:2004:i:2:p:456-475

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Related research
Keywords: overlapping generations; endogenous labor supply; gross substitutability; multiple equilibria; endogenous fluctuations.;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium

References listed on IDEAS
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  1. Chiappori, Pierre-Andre, 1992. "Collective Labor Supply and Welfare," Journal of Political Economy, University of Chicago Press, vol. 100(3), pages 437-67, June. [Downloadable!] (restricted)
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  2. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 309-327, November. [Downloadable!] (restricted)
  3. Luisa Fuster, 1999. "Is Altruism Important for Understanding the Long-Run Effects of Social Security?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 616-637, July. [Downloadable!] (restricted)
    Other versions:
  4. Nourry, Carine, 2001. "Stability of equilibria in the overlapping generations model with endogenous labor supply," Journal of Economic Dynamics and Control, Elsevier, vol. 25(10), pages 1647-1663, October. [Downloadable!] (restricted)
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  5. Cazzavillan, Guido & Lloyd-Braga, Teresa & Pintus, Patrick A., 1998. "Multiple Steady States and Endogenous Fluctuations with Increasing Returns to Scale in Production," Journal of Economic Theory, Elsevier, vol. 80(1), pages 60-107, May. [Downloadable!] (restricted)
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  6. Boldrin, Michael & Horvath, Michael, 1995. "Labor Contracts and Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 103(5), pages 972-1004, October. [Downloadable!] (restricted)
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  7. Geanakoplos, J D & Polemarchakis, H M, 1986. "Walrasian Indeterminacy and Keynesian Macroeconomics," Review of Economic Studies, Blackwell Publishing, vol. 53(5), pages 755-79, October. [Downloadable!] (restricted)
  8. Thomas F. Cooley & Jorge Soares, 1999. "A Positive Theory of Social Security Based on Reputation," Journal of Political Economy, University of Chicago Press, vol. 107(1), pages 135-160, February. [Downloadable!] (restricted)
  9. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October. [Downloadable!] (restricted)
  10. Aloi, Marta & Dixon, Huw D. & Lloyd-Braga, Teresa, 2000. "Endogenous fluctuations in an open economy with increasing returns to scale," Journal of Economic Dynamics and Control, Elsevier, vol. 24(1), pages 97-125, January. [Downloadable!] (restricted)
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  11. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January. [Downloadable!] (restricted)
  12. Grandmont, Jean-Michel & Pintus, Patrick & de Vilder, Robin, 1998. "Capital-Labor Substitution and Competitive Nonlinear Endogenous Business Cycles," Journal of Economic Theory, Elsevier, vol. 80(1), pages 14-59, May. [Downloadable!] (restricted)
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  13. Michele Boldrin & Aldo Rustichini, 2000. "Political Equilibria with Social Security," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(1), pages 41-78, January. [Downloadable!] (restricted)
  14. Benhabib, Jess & Laroque, Guy, 1988. "On competitive cycles in productive economies," Journal of Economic Theory, Elsevier, vol. 45(1), pages 145-170, June. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mino, Kazuo, 2006. "Consumption Externalities and Capital Accumulation in an Overlapping Generations Economy," MPRA Paper 17016, University Library of Munich, Germany. [Downloadable!]
  2. Lloyd-Braga, Teresa & Nourry, Carine & Venditti, Alain, 2005. "Indeterminacy in Dynamic Models: When Diamond Meets Ramsey," CEPR Discussion Papers 5255, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Zhang, Yan & Chen, Yan, 2009. "Endogenous income taxes in OLG economies," MPRA Paper 16412, University Library of Munich, Germany. [Downloadable!]
  4. Stefano Bosi & Thomas Seegmuller, 2006. "Can heterogeneous preferences stabilize endogenous fluctuations ?," Cahiers de la Maison des Sciences Economiques v06082, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
  5. Thomas Seegmuller, 2009. "Capital-labor Substitution and Endogenous Fluctuations: a Monopolistic Competition Approach with Variable Mark-up," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00194292_v1, HAL. [Downloadable!]
  6. Emmanuel Thibault, 2008. "Dynamic efficiency and intergenerational altruism," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(3), pages 679-687, July. [Downloadable!] (restricted)
  7. Stefano Bosi & Thomas Seegmuller, 2008. "Can Heterogeneous Preferences Stabilize Endogenous Fluctuations?," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00266713_v1, HAL. [Downloadable!]
  8. Chen, Yan & Zhang, Yan, 2009. "Endogenous income taxes in OLG economies: A clarification," MPRA Paper 16824, University Library of Munich, Germany. [Downloadable!]
  9. Guido Cazzavillan & Patrick Pintus, 2006. "Endogenous Business Cycles and Dynamic Inefficiency," Working Papers 2006_37, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
    Other versions:
  10. Gomes, Orlando, 2007. "A two-dimensional non-equilibrium dynamic model," MPRA Paper 4817, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  11. Gomes, Orlando, 2007. "Consumer confidence, endogenous growth and endogenous cycles," MPRA Paper 2883, University Library of Munich, Germany. [Downloadable!]
  12. D'ALBIS Hippolyte & AUGERAUD-VERON Emmanuelle, 2007. "Endogenous Retirement and Monetary Cycles," Working Papers 07.14.235, LERNA, University of Toulouse. [Downloadable!]
    Other versions:
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