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Dynamic Efficiency and Pareto Optimality in a Stochastic OLG Model with Production and Social Security

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Author Info
Barbie, Martin (Department of Economics, University of Bonn)
Hagedorn, Marcus (IZA, Bonn)
Kaul, Ashok () (IZA, Bonn)
Abstract

We 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.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 209.

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Length: 41 pages
Date of creation: Oct 2000
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Handle: RePEc:iza:izadps:dp209

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Related research
Keywords: 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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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.:
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  2. Dutta,Jayasri Polemarchakes,Herakles, 1988. "Asset markets and equilibrium processes," Discussion Paper Serie A 203, University of Bonn, Germany.
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  4. 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)
  5. Rhee, Changyong, 1991. "Dynamic Inefficiency in an Economy with Land," Review of Economic Studies, Blackwell Publishing, vol. 58(4), pages 791-97, July. [Downloadable!] (restricted)
  6. Demange, G., 1998. "On the Efficiency of Intergenerational Risk Sharing and Capital Accumulation in an Economy with Land," DELTA Working Papers 98-21, DELTA (Ecole normale supérieure).
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  8. 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. [Downloadable!] (restricted)
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  10. Gabrielle Demange & Guy Laroque, 1999. "Social Security and Demographic Shocks," Econometrica, Econometric Society, vol. 67(3), pages 527-542, May.
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  11. Dechert, W Davis & Yamamoto, Kenji, 1992. "Asset Valuation and Production Efficiency in an Overlapping-Generations Model with Production Shocks," Review of Economic Studies, Blackwell Publishing, vol. 59(2), pages 389-405, April. [Downloadable!] (restricted)
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  16. Dutta, Jayasri & Polemarchakis, Herakles, 1990. "Asset Markets and Equilibrium Processes," Review of Economic Studies, Blackwell Publishing, vol. 57(2), pages 229-54, April. [Downloadable!] (restricted)
  17. Okuno, Masahiro & Zilcha, Itzhak, 1980. "On the Efficiency of a Competitive Equilibrium in Infinite Horizon Monetary Economies," Review of Economic Studies, Blackwell Publishing, vol. 47(4), pages 797-807, July. [Downloadable!] (restricted)
  18. 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. [Downloadable!] (restricted)
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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. 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. [Downloadable!]
    Other versions:
  2. Olivier Blanchard & Philippe Weil, 2001. "Dynamic Efficiency, the Riskless Rate, and Debt Ponzi Games under Uncertainty," Advances in Macroeconomics, Berkeley Electronic Press, vol. 1(advances/), pages 1031-1031. [Downloadable!] (restricted)
    Other versions:
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