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Informational Constraints and the Overlapping Generations Model: Folk and Anti-Folk Theorems

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  • V. Bhaskar

Abstract

This paper analyses the sustainability of inter-generational transfers in Samuelson's consumption-loan model when agents are imperfectly informed about past events. We find that with mild informational constraints, transfers cannot be supported by pure-strategy equilibria. Mixed strategies allow transfers to be sustained even if agents have little information, so that a version of the Folk theorem holds. However, these equilibria are not robust. If each agent's utility function is subjected to a small random perturbation as in Harsanyi (1973), these mixed strategy equilibria unravel, and only the zero-transfer allocation survives as the unique rationalizable outcome. This result is an example of mixed strategy equilibrium of an extensive form game which cannot be purified.

Suggested Citation

  • V. Bhaskar, 1998. "Informational Constraints and the Overlapping Generations Model: Folk and Anti-Folk Theorems," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 65(1), pages 135-149.
    • Handle: RePEc:oup:restud:v:65:y:1998:i:1:p:135-149.
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    File URL: http://hdl.handle.net/10.1111/1467-937X.00038
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