Dynamic Suboptimality of Competitive Equilibrium in Multiperiod Stochastic Overlapping Generations Economies
AbstractThe question we ask is: within the set of a three-period-lived OLG economies with a stochastic endowment process, a stochastic dividend process, and sequentially complete markets, under what set of conditions may a set of government transfers dynamically Pareto dominate the laissez faire equilibrium? We start by characterizing perfect risk sharing and find that it implies a strongly stationary set of state-dependent consumption claims. We also derive the stochastic equivalent of the deterministic steady-state by steady-state optimal marginal rate of substitution. We show then that the risk sharing of the recursive competitive laissez faire equilibrium of any overlapping generations economy with weakly more than three generations is nonstationary and that risk is suboptimally shared. We then show that we can construct a sequence of consumption allocations that only depends on the exogenous state and which Pareto dominate the laissez faire allocations in an ex interim as well as ex ante sense. We also redefine conditional Pareto optimality to apply within this framework and show that under a broad set of conditions, there also exists a sequence of allocations that dominates the laissez faire equilibrium in this sense. Finally, we apply these tools and results to an economy where the endowment is constant, but where fertility is stochastic, i.e. the number of newborn individuals who enters the economy follows a Markov Process.
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 35.
Date of creation: 03 Dec 2006
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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competitive equilibrium; stochastic overlapping generations;
Find related papers by JEL classification:
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
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