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Intermediation, Bubbles, and Pareto Efficiency in Economies with Production

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  • Pingle, Mark
  • Tesfatsion, Leigh

Abstract

In a recent study, Tirole (1985) extends Diamond's (1965, pp. 1130-1135) well-known overlapping generations model of a private production economy by permitting consumption loans. That is, in addition to financing the capital investment of firms, the savings of one generation can be used to finance the consumption of agents in other generations whose consumption demands are in excess of their endowments. Tirole then shows that the re sulting production-consumption loan economy fails to satisfy the First Welfare Theorem. Specifically, as reviewed in Section 2, below, two stationary competitive equilibria exist for this economy: a Pareto inefficient equilibrium e with no consumption loans; and a Pareto efficient "golden-rule" equihbrium e" in which consumption loans are made...

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  • Pingle, Mark & Tesfatsion, Leigh, 1991. "Intermediation, Bubbles, and Pareto Efficiency in Economies with Production," ISU General Staff Papers 199104010800001022, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:199104010800001022
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