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Active Intermediation in Overlapping Generations Economies with Production and Unsecured Debt

  • Pingle, Mark
  • Tesfatsion, Leigh S.

Why does the First Welfare Theorem fail in standard overlapping generations economies with production, such as Diamond (AER, 1965) and Tirole (Econometrica, 1985)? This study argues that the reason for this failure can be attributed to the passive intermediation role played by the Walrasian Auctioneer in this models. Specifically, the study demonstrates that when intermediation is instead modeled as a contestable activity carried out by corporate intermediaries owned by consumer-shareholders and operated in their interest, every equilibrium is Pareto efficient. Annotated pointers to related work can be accessed here: http://www.econ.iastate.edu/tesfatsi/dehome.htm

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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 1953.

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Date of creation: 01 Jan 1998
Date of revision:
Publication status: Published in Macroeconomic Dynamics 1998, vol. 2, pp. 183-212
Handle: RePEc:isu:genres:1953
Contact details of provider: Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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  1. Hannan, Timothy H & Berger, Allen N, 1991. "The Rigidity of Prices: Evidence from the Banking Industry," American Economic Review, American Economic Association, vol. 81(4), pages 938-45, September.
  2. Leigh TESFATSION, 1995. "How Economists Can Get Alife," Economic Report 37, Iowa State University Department of Economics.
  3. Pingle, Mark & Tesfatsion, Leigh, 1998. "Active intermediation in a monetary overlapping generations economy1," Journal of Economic Dynamics and Control, Elsevier, vol. 22(10), pages 1543-1574, August.
  4. Bryant, John, 1981. "Bank Collapse and Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(4), pages 454-64, November.
  5. GRANDMONT, Jean-Michel & LAROQUE, Guy, . "Money in the pure consumption loan model," CORE Discussion Papers RP -152, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-88, August.
  7. Mark Pingle & Leigh Tesfatsion, 1993. "``Active Intermediation in a Monetary Overlapping Generations Economy''," Macroeconomics 9312001, EconWPA, revised 04 Dec 1993.
  8. Pingle, M. & Tesfatsion, Leigh S., 1991. "Overlapping Generations, Intermediation, and the First Welfare Theorem," Staff General Research Papers 11185, Iowa State University, Department of Economics.
  9. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  10. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  11. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  12. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  13. Shell, Karl, 1971. "Notes on the Economics of Infinity," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1002-11, Sept.-Oct.
  14. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
  15. repec:cup:cbooks:9781107003491 is not listed on IDEAS
  16. Balasko, Yves & Shell, Karl, 1981. "The overlapping-generations model. II. The case of pure exchange with money," Journal of Economic Theory, Elsevier, vol. 24(1), pages 112-142, February.
  17. Bennett T. McCallum, 1988. "The Optimal Inflation Rate in an Overlapping-Generations Economy with Land," NBER Working Papers 1892, National Bureau of Economic Research, Inc.
  18. 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.
  19. David Cass & Menahem E. Yaari, 1966. "A Re-examination of the Pure Consumption Loans Model," Journal of Political Economy, University of Chicago Press, vol. 74, pages 353.
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