Stationary Equilibrium In An Altruistic Two Sector Economy
We study an overlapping generations economy with altruistic agents in which the productivity of a child?s labour endowment depends on an idiosyncratic shock and on the resources spent by her parent in education her. The parent cannot borrow but can leave a nonnegative bequest which earns a deterministic return in the capital market; this possibility mitigates the liquidity constraint faced by an agent when deciding on the level of education for her child. The shock is assumed to follow a Markov process thus allowing for serial correlation in abilities. A stationary equilibrium of the model is a situation in which the endogenously determined aggregate amounts of capital and efficiency units of labour remain constant, so factor prices are constant, the choices made by agents can be summarized via an invariant distribution, and factor supplies are determined by the mean, taken with respect to the invariant distribution, of the agents? decision rules, and all the markets clear. We develop and discuss conditions under which a stationary equilibrium exists.
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