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A Characterization of Inefficiency in Stochastic Overlapping Generations Economies

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  • Bloise, Gaetano
  • Calciano, Filippo L.

Abstract

In this paper, we provide a characterization of interim inefficiency in stochastic economies of overlapping generations under possibly sequentially incomplete markets. With respect to the established body of results in the literature, we remove the hypothesis of two-period horizons, by considering longer, though uniformly bounded, horizons for generations. The characterization exploits a suitably Modified Cass Criterion, grounded on the long-rung behavior of compounded safe interest rates and independent of the length of horizons of generations. Thus, the hypothesis of two-period horizons is purely heuristic in establishing a criterion for inefficiency. In addition, for sequentially incomplete markets, we adopt a suitable notion of unambiguous inefficiency, separating the inefficient intertemporal allocation of resources from incomplete risk-sharing. Unambiguous inefficiency reduces to inefficiency when markets are sequentially complete.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8780.

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Date of creation: 2007
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Handle: RePEc:pra:mprapa:8780

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  1. Subir Chattopadhyay & Piero Gottardi, 1999. "Stochastic OLG Models, Market Structure, and Optimality," Working Papers 99-12, Brown University, Department of Economics.
  2. Benveniste, Lawrence M, 1986. "Pricing Optimal Distributions to Overlapping Generations: A Corollary to Efficiency Pricing [A Complete Characterization of Efficiency in a General Capital Accumulation Model]," Review of Economic Studies, Wiley Blackwell, vol. 53(2), pages 301-06, April.
  3. 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.
  4. Geanakoplos, J. & Polemarchakis, H., 1991. "Overlapping generations," CORE Discussion Papers 1991031, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. 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.
  6. Molina-Abraldes, Antonio & Pintos-Clapes, Juan, 2003. "A complete characterization of Pareto optimality for general OLG economies," Journal of Economic Theory, Elsevier, vol. 113(2), pages 235-252, December.
  7. 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.
  8. Aliprantis, C. D. & Florenzano, M. & Martins-da-Rocha, V. F. & Tourky, R., 2004. "Equilibrium analysis in financial markets with countably many securities," Journal of Mathematical Economics, Elsevier, vol. 40(6), pages 683-699, September.
  9. Balasko, Yves & Cass, David & Shell, Karl, 1980. "Existence of competitive equilibrium in a general overlapping-generations model," Journal of Economic Theory, Elsevier, vol. 23(3), pages 307-322, December.
  10. 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.
  11. 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.
  12. Aliprantis, C. D. & Brown, D. J. & Polyrakis, I. A. & Werner, J., 1998. "Portfolio dominance and optimality in infinite security markets," Journal of Mathematical Economics, Elsevier, vol. 30(3), pages 347-366, October.
  13. Burke, Jonathan L., 1987. "Inactive transfer policies and efficiency in general overlapping-generations economies," Journal of Mathematical Economics, Elsevier, vol. 16(3), pages 201-222, June.
  14. Geanakoplos, John D. & Polemarchakis, Heraklis M., 1991. "Overlapping generations," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 35, pages 1899-1960 Elsevier.
  15. Benveniste, Lawrence M., 1976. "A complete characterization of efficiency for a general capital accumulation model," Journal of Economic Theory, Elsevier, vol. 12(2), pages 325-337, April.
  16. repec:fth:louvco:9131 is not listed on IDEAS
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Cited by:
  1. Orrego, Fabrizio, 2011. "Sequential incompleteness and dynamic suboptimality in stochastic OLG economies with production," Working Papers 2011-014, Banco Central de Reserva del Perú.
  2. Bloise, Gaetano & Reichlin, Pietro, 2008. "Asset Prices, Debt Constraints and Inefficiency," CEPR Discussion Papers 6779, C.E.P.R. Discussion Papers.
  3. Fabrizio Orrego & Stephen Spear, . "Sequential incompleteness and dynamic suboptimality in stochastic OLG economies with production," GSIA Working Papers 2012-E38, Carnegie Mellon University, Tepper School of Business.
  4. Becker, Robert & Mitra, Tapan, 2011. "Efficient Ramsey Equilibria," Working Papers 11-02, Cornell University, Center for Analytic Economics.
  5. Ohtaki, Eisei, 2013. "Golden rule optimality in stochastic OLG economies," Mathematical Social Sciences, Elsevier, vol. 65(1), pages 60-66.

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