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Endogenous labor supply and Diamond's (1965) model: a reconsideration of the debt role

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Author Info
Luciano Fanti
Luca Spataro

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Abstract

this paper we show that, when elastic labor supply is considered via Cobb Douglas preferences, dynamic inefficiency of OLG economies, while being still a necessary condition, is no longer sufficient for an internal public debt increase to generate a Pareto improvement. This is due to the fact that the equilibrium interest rate can move in the "wrong" direction due to the reaction of labor supply. Consequently, raising the level of debt when the economy is experiencing dynamic inefficiency could even be welfare-worsening, in contrast with Diamond (1965).

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File URL: http://www.dse.ec.unipi.it/pubblicazioni/dsedps/files/2003-22.pdf
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Publisher Info
Paper provided by Dipartimento di Scienze Economiche (DSE), University of Pisa, Pisa, Italy in its series Discussion Papers with number 2003/22.

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Date of creation: 01 Jan 2004
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Handle: RePEc:pie:dsedps:2003/22

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Related research
Keywords: Overlapping Generations; endogenous labor supply; dynamic inefficiency; debt;

Find related papers by JEL classification:
D91 - Microeconomics - - Intertemporal Choice and Growth - - - Intertemporal Consumer Choice; Life Cycle Models and Saving
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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