Overlapping Generations, Intermediation, and the First Welfare Theorem
First Welfare Theorem fails to hold for standard pure exchange overlapping generations economies because no agent exploits the profit opportunities which can arise from mediating intertemporal trade. This paper modifies the standard economy by introducing an optimizing corporate intermediary which distributes net earnings back to consumer-shareholders. The Pareto inefficient no-trade state, which is a stationary equilibrium for the standard economy, cannot be an equilibrium for this modified "Brokerage Economy" because the intermediary perceives unbounded earnings opportunities. If the intermediary seeks to maximize the minimum dividend per share distributed over time, then there is a unique Pareto effecient stationary equilibrium for the Brokerage Economy.Annotated pointers to related work can be accessed at http://www.econ.iastate.edu/tesfatsi/dehome.htm
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|Date of creation:||01 Nov 1991|
|Date of revision:|
|Publication status:||Published in Journal of Economic Behavior and Organization, November 1991, vol. 15, pp. 325-345|
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Web page: http://www.econ.iastate.edu
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