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Efficiency and prices in economies of overlapping generations

  • Bloise, Gaetano

In a general economy of overlapping generations, I introduce a notion of uniform inefficiency, corresponding to the occurrence of a Pareto improvement with a small uniform destruction of resources [G. Debreu, The coefficient of resource utilization, Econometrica 19 (1951) 273-292]. I provide a necessary and sufficient condition for uniform inefficiency in terms of prices at a competitive equilibrium: an allocation is uniformly inefficient if and only if the relative price of the aggregate endowment in a given period into the aggregate endowment up to that period does not vanish over periods of trade, a sort of Modified Cass Criterion [D. Cass, On capital overaccumulation in the aggregative neoclassical model of economic growth: a complete characterization, J. Econ. Theory 4 (1972) 200-223]. Minimal assumptions on fundamentals are needed for such a complete characterization. Furthermore, proofs reduce to simple and short direct arguments. Finally, I verify that uniform inefficiency is preserved under perturbations, a property that might fail for the canonical notion of inefficiency. Remarkably, an allocation is uniformly inefficient if and only if a non-vanishing redistribution, like a social security mechanism, is welfare improving.

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Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 141 (2008)
Issue (Month): 1 (July)
Pages: 200-224

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Handle: RePEc:eee:jetheo:v:141:y:2008:i:1:p:200-224
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622869

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  1. 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.
  2. Jonathan L. Burke, 1999. "The robustness of optimal equilibrium among overlapping generations," Economic Theory, Springer, vol. 14(2), pages 311-329.
  3. 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.
  4. 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.
  5. Burke, Jonathan L, 1995. "Existence of a Pareto-Optimal Equilibrium in Nearly-Stationary Overlapping-Generations Economies," Economic Theory, Springer, vol. 5(2), pages 247-61, March.
  6. 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.
  7. 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.
  8. 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.
  9. Chattopadhyay, Subir & Gottardi, Piero, 1999. "Stochastic OLG Models, Market Structure, and Optimality," Journal of Economic Theory, Elsevier, vol. 89(1), pages 21-67, November.
  10. 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.
  11. 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.
  12. 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.
  13. Richard, Scott F. & Srivastava, Sanjay, 1988. "Equilibrium in economies with infinitely many consumers and infinitely many commodities," Journal of Mathematical Economics, Elsevier, vol. 17(1), pages 9-21, February.
  14. Geanakoplos, J. & Polemarchakis, H., 1991. "Overlapping generations," CORE Discussion Papers 1991031, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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