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Overlapping-Generations Economies under Uncertainty: Dynamic Inefficiency/Efficiency with Multiple Assets and no Labour

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  • Martin F. Hellwig

    (Max Planck Institute for Research on Collective Goods, Bonn)

Abstract

The paper gives conditions for efficiency and inefficiency of equilibrium allocations in an overlapping-generations model with a constant rate of population growth and with multiple assets, but without labour. Optimal portfolio choice implies that, for any period and history up to that period, the conditional certainty equivalents of the one-period-ahead marginal rates of return must be the same for all assets that are held in positive amounts. The efficiency or inefficiency of equilibrium allocations depends on whether this common conditional certainty equivalent of returns on assets is larger or smaller than the population growth rate. If the growth rate is uncertain, the standard of comparison is the certainty equivalent of the population growth rate when interpreted as a marginal rate of return on an asset.

Suggested Citation

  • Martin F. Hellwig, 2023. "Overlapping-Generations Economies under Uncertainty: Dynamic Inefficiency/Efficiency with Multiple Assets and no Labour," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2023_04, Max Planck Institute for Research on Collective Goods.
    • Handle: RePEc:mpg:wpaper:2023_04
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    References listed on IDEAS

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    5. 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.
    6. Olivier J Blanchard, 2019. "Public Debt: Fiscal and Welfare Costs in a Time of Low Interest Rates," Policy Briefs PB19-2, Peterson Institute for International Economics.
    7. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
    8. LeRoy,Stephen F. & Werner,Jan, 2014. "Principles of Financial Economics," Cambridge Books, Cambridge University Press, number 9781107024120, February.
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    Cited by:

    1. Martin F. Hellwig, 2023. "The Economics of Hilbert's Hotel: An Expository Note," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2023_05, Max Planck Institute for Research on Collective Goods.

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    More about this item

    Keywords

    Dynamic Inefficiency; overlapping-generations models; First Welfare Theorem; certainty-equivalents criterion;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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