mic Efficiency and Pareto Optimality in a Stochastic OLG Model with Production and Social Security
AbstractWe analyze the interaction between risk sharing and capital accumulation in a stochastic OLG model with production. We give a complete characterization of interim Pareto optimality. Our characterization also subsumes equilibria with a PAYG social security system. In a competitive equilibrium interim Pareto optimality is equivalent to intergenerational exchange efficiency, which in turn implies dynamic efficiency. Furthermore, dynamic efficiency does not rule out a Pareto-improving role for a social security system. Social security can provide insurance against macroeconomic risk, namely aggregate productivity risk in the second period of life (old age) through dynamic risk sharing. We briefly relate our results to models without uncertainty where the notions of exchange efficiency, dynamic efficiency and interim Pareto optimality are all equivalent in a competitive equilibrium.
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Bibliographic InfoPaper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse8_2000.
Length: 31 pages
Date of creation: Feb 2000
Date of revision: Jun 2000
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Stochastic OLG Model; Dynamic Efficiency; Interim Pareto Optimality; Social Security; Risk Sharing;
Find related papers by JEL classification:
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
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