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Existence and stability of overconsumption equilibria

  • Ponthiere, Gregory

Growth models with endogenous mortality assume generally that life expectancy is increasing with output per capita and, thus, with individual consumption, whatever its level is. However, empirical evidence supports a U-shaped relationship between consumption and mortality, implying that the monotonicity of that relation is local but not global. This paper develops a two-period OLG model where life expectancy is a non-monotone function of consumption, and where agents form myopic anticipations about life expectancy. The existence, uniqueness and stability of steady-state equilibria are studied. It is shown that overconsumption equilibria -- i.e. equilibria at which consumption exceeds the level maximizing life expectancy -- exist in highly productive economies with a low impatience. We identify also conditions under which there exist long-run cycles in output and longevity around overconsumption equilibria.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 28 (2011)
Issue (Month): 1-2 (January)
Pages: 74-90

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Handle: RePEc:eee:ecmode:v:28:y:2011:i:1-2:p:74-90
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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