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A Characterization of Inefficiency in Stochastic Overlapping Generations Economies

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Bloise, Gaetano
Calciano, Filippo L.

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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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Find related papers by JEL classification:
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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  1. 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)
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  1. Gaetano Bloise & Pietro Reichlin, 2008. "Asset Prices, Debt Constraints And Inefficiency," Departmental Working Papers of Economics - University 'Roma Tre' 0089, Department of Economics - University Roma Tre. [Downloadable!]
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