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mic Efficiency and Pareto Optimality in a Stochastic OLG Model with Production and Social Security

  • Martin Barbie
  • Marcus Hagedorn
  • Ashok Kaul

We analyze the interaction between risk sharing and capital accumulation in a stochastic OLG model with production. We give a complete characterization of interim Pareto optimality. Our characterization also subsumes equilibria with a PAYG social security system. In a competitive equilibrium interim Pareto optimality is equivalent to intergenerational exchange efficiency, which in turn implies dynamic efficiency. Furthermore, dynamic efficiency does not rule out a Pareto-improving role for a social security system. Social security can provide insurance against macroeconomic risk, namely aggregate productivity risk in the second period of life (old age) through dynamic risk sharing. We briefly relate our results to models without uncertainty where the notions of exchange efficiency, dynamic efficiency and interim Pareto optimality are all equivalent in a competitive equilibrium.

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Paper provided by University of Bonn, Germany in its series Bonn Econ Discussion Papers with number bgse8_2000.

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Length: 31 pages
Date of creation: Feb 2000
Date of revision: Jun 2000
Handle: RePEc:bon:bonedp:bgse8_2000
Contact details of provider: Postal: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany
Fax: +49 228 73 6884
Web page: http://www.bgse.uni-bonn.de

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  14. Dutta,Jayasri Polemarchakes,Herakles, 1988. "Asset markets and equilibrium processes," Discussion Paper Serie A 203, University of Bonn, Germany.
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  17. Rao Aiyagari, S. & Peled, Dan, 1991. "Dominant root characterization of Pareto optimality and the existence of optimal equilibria in stochastic overlapping generations models," Journal of Economic Theory, Elsevier, vol. 54(1), pages 69-83, June.
  18. Manuelli, Rodolfo, 1990. "Existence and optimality of currency equilibrium in stochastic overlapping generations models: The pure endowment case," Journal of Economic Theory, Elsevier, vol. 51(2), pages 268-294, August.
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