Dynamic 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, contrary to the case of certainty, dynamic effi-ciency 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. The mechanism through which social security can Pareto-improve market allocations resembles a Ponzi scheme. But instead of rolling over debt, we can interpret our scheme as one that raises contributions and then rolls over an insurance contract.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 209.
Length: 42 pages
Date of creation: Oct 2000
Date of revision:
Contact details of provider:
Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
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
This paper has been announced in the following NEP Reports:
- NEP-DGE-2000-11-20 (Dynamic General Equilibrium)
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.:
- Manuelli, Rodolfo, 1990. "Existence and optimality of currency equilibrium in stochastic overlapping generations models: The pure endowment case," Journal of Economic Theory, Elsevier, vol. 51(2), pages 268-294, August.
- Stefan Homburg, 1991. "Interest and Growth in an Economy with Land," Canadian Journal of Economics, Canadian Economics Association, vol. 24(2), pages 450-59, May.
- Balasko, Yves & Shell, Karl, 1981. "The overlapping-generations model. II. The case of pure exchange with money," Journal of Economic Theory, Elsevier, vol. 24(1), pages 112-142, February.
- Demange, Gabrielle & Laroque, Guy, 2000. " Social Security, Optimality, and Equilibria in a Stochastic Overlapping Generations Economy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 2(1), pages 1-23.
- Dechert, W Davis & Yamamoto, Kenji, 1992. "Asset Valuation and Production Efficiency in an Overlapping-Generations Model with Production Shocks," Review of Economic Studies, Wiley Blackwell, vol. 59(2), pages 389-405, April.
- Cass, David, 1972. "On capital overaccumulation in the aggregative, neoclassical model of economic growth: A complete characterization," Journal of Economic Theory, Elsevier, vol. 4(2), pages 200-223, April.
- Peled, Dan, 1982. "Informational diversity over time and the optimality of monetary equilibria," Journal of Economic Theory, Elsevier, vol. 28(2), pages 255-274, December.
- Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
- Dutta, Jayasri & Polemarchakis, Herakles, 1990. "Asset Markets and Equilibrium Processes," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 229-54, April.
- Dutta,Jayasri Polemarchakes,Herakles, 1988. "Asset markets and equilibrium processes," Discussion Paper Serie A 203, University of Bonn, Germany.
- Rhee, Changyong, 1991. "Dynamic Inefficiency in an Economy with Land," Review of Economic Studies, Wiley Blackwell, vol. 58(4), pages 791-97, July.
- Gabrielle Demange & Guy Laroque, 1999.
"Social Security and Demographic Shocks,"
Econometric Society, vol. 67(3), pages 527-542, May.
- Benveniste, Lawrence & Gale, David, 1975. "An extension of Cass' characterization of infinite efficient production programs," Journal of Economic Theory, Elsevier, vol. 10(2), pages 229-238, April.
- Abel, Andrew B, et al, 1989.
"Assessing Dynamic Efficiency: Theory and Evidence,"
Review of Economic Studies,
Wiley Blackwell, vol. 56(1), pages 1-19, January.
- Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, . "Assessing Dynamic Efficiency: Theory and Evidence," Rodney L. White Center for Financial Research Working Papers 14-88, Wharton School Rodney L. White Center for Financial Research.
- Andrew B. Abel & N. Gregory Mankiw & Lawrence H. Summers & Richard J. Zeckhauser, 1986. "Assessing Dynamic Efficiency: Theory and Evidence," NBER Working Papers 2097, National Bureau of Economic Research, Inc.
- Okuno, Masahiro & Zilcha, Itzhak, 1980. "On the Efficiency of a Competitive Equilibrium in Infinite Horizon Monetary Economies," Review of Economic Studies, Wiley Blackwell, vol. 47(4), pages 797-807, July.
- Subir Chattopadhyay & Piero Gottardi, 1999.
"Stochastic OLG Models, Market Structure, and Optimality,"
99-12, Brown University, Department of Economics.
- Chattopadhyay, Subir & Gottardi, Piero, 1999. "Stochastic OLG Models, Market Structure, and Optimality," Journal of Economic Theory, Elsevier, vol. 89(1), pages 21-67, November.
- Piero Gottardi & Subir Chattopadhyay, 1999. "- Stochastic Olg Models, Market Structure And Optimality," Working Papers. Serie AD 1999-15, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
- Wolfram Richter, 1993. "Intergenerational risk sharing and social security in an economy with land," Journal of Economics, Springer, vol. 58(1), pages 91-103, December.
- Bose, Amitava & Ray, Debraj, 1993.
"Monetary Equilibrium in an Overlapping Generations Model with Productive Capital,"
Springer, vol. 3(4), pages 697-716, October.
- Ray, D. & Bose, A., 1992. "Monetary Equilibrium in an Overlapping Generations Models with Productive Capital," Papers 16, Boston University - Department of Economics.
- Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
- Mitra, Tapan, 1979. "Identifying inefficiency in smooth aggregative models of economic growth : A unifying criterion," Journal of Mathematical Economics, Elsevier, vol. 6(1), pages 85-111, March.
- 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.
- Balasko, Yves & Shell, Karl, 1980. "The overlapping-generations model, I: The case of pure exchange without money," Journal of Economic Theory, Elsevier, vol. 23(3), pages 281-306, December.
- Wolfram Richter, 1993. "Intergenerational risk sharing and social security in an economy with land," Journal of Economics, Springer, vol. 7(1), pages 91-103, December.
- Matsen, Egil & Thogersen, Oystein, 2004.
"Designing social security - a portfolio choice approach,"
European Economic Review,
Elsevier, vol. 48(4), pages 883-904, August.
- Egil Matsen & Øystein Thøgersen, 2000. "Designing Social Security – A Portfolio Choice Approach," Working Paper Series 1102, Department of Economics, Norwegian University of Science and Technology.
- Matsen, E. & Thogersen, O., 2001. "Designing Social Security - A Portfolio Choice Approach," Papers 21/2001, Norwegian School of Economics and Business Administration-.
- Lucas Bretschger & Karen Pittel, 2005.
"Innovative Investments, Natural Resources and Intergenerational Fairness: Are Pension Funds Good for Sustainable Development?,"
Swiss Journal of Economics and Statistics (SJES),
Swiss Society of Economics and Statistics (SSES), vol. 141(III), pages 355-376, September.
- Lucas Bretschger & Karen Pittel, 2005. "Innovative investments, natural resources, and intergenerational fairness : are pension funds good for sustainable development?," CER-ETH Economics working paper series 05/36, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
- Bretschger, Lucas & Pittel, Karen, 2005. "Innovative investments, natural resources, and intergenerational fairness, are pension funds good for sustainable development?," Munich Reprints in Economics 20225, University of Munich, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.