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Dynamic Inefficiency in an Overlapping Generations Economy with Production

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Author Info

  • Guido Cazzavillan

    ()
    (Department of Economics, University Of Venice Ca’ Foscari)

  • Patrick Pintus

    (Universitè de la Mèditerranée and GREQAM-IDEP, France)

Abstract

Reichlin (JET, 1986) has shown in an OLG model with productive capital that whenever the steady state is locally indeterminate and undergoes a Hopf bifurcation, it is Pareto-optimal. While these results were established under the assumption of Leontief technology, the author has partially extended them to show that the Hopf bifurcation is robust with respect to the introduction of capital-labor substitution. In this note, we prove that the Pareto-optimality of the steady state does not extend to technologies with capital-labor substitution. When the steady state is a sink or undergoes a Hopf bifurcation, it is characterized by over-accumulation with respect to the Golden Rule - the interest rate is negative - hence not Pareto-optimal. Most importantly, it follows that stabilization policies targeting the steady state leave room for welfare losses associated with productive inefficiency, apart from the very special case of Leontief technology.

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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2006_40.

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Length: 14 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:ven:wpaper:2006_40

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Keywords: Endogenous fluctuations; local bifurcations; dynamic inefficiency;

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References

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  1. Cazzavillan, Guido & Lloyd-Braga, Teresa & Pintus, Patrick, 1996. "Multiple steady states and endogenous fluctuations with increasing returns to scale in production," CEPREMAP Working Papers (Couverture Orange) 9618, CEPREMAP.
  2. Reichlin, Pietro, 1986. "Equilibrium cycles in an overlapping generations economy with production," Journal of Economic Theory, Elsevier, vol. 40(1), pages 89-102, October.
  3. Guido Cazzavillan & Patrick Pintus, 2006. "Endogenous Business Cycles and Dynamic Inefficiency," Working Papers 2006_37, Department of Economics, University of Venice "Ca' Foscari".
  4. Cazzavillan, Guido, 2001. "Indeterminacy and Endogenous Fluctuations with Arbitrarily Small Externalities," Journal of Economic Theory, Elsevier, vol. 101(1), pages 133-157, November.
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Cited by:
  1. Carine Nourry & Alain Venditti, 2009. "Local indeterminacy under dynamic efficiency in a two-sector overlapping generations economy," Working Papers halshs-00439240, HAL.
  2. Nourry, Carine & Venditti, Alain, 2012. "Endogenous Business Cycles In Overlapping-Generations Economies With Multiple Consumption Goods," Macroeconomic Dynamics, Cambridge University Press, vol. 16(S1), pages 86-102, April.
  3. Drugeon, Jean-Pierre & Nourry, Carine & Venditti, Alain, 2010. "On efficiency and local uniqueness in two-sector OLG economies," Mathematical Social Sciences, Elsevier, vol. 59(1), pages 120-144, January.
  4. repec:hal:wpaper:halshs-00439241 is not listed on IDEAS

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