Endogenous labor supply and Diamond's (1965) model: a reconsideration of the debt role
this paper we show that, when elastic labor supply is considered via Cobb Douglas preferences, dynamic inefficiency of OLG economies, while being still a necessary condition, is no longer sufficient for an internal public debt increase to generate a Pareto improvement. This is due to the fact that the equilibrium interest rate can move in the "wrong" direction due to the reaction of labor supply. Consequently, raising the level of debt when the economy is experiencing dynamic inefficiency could even be welfare-worsening, in contrast with Diamond (1965).
|Date of creation:||01 Jan 2004|
|Date of revision:|
|Contact details of provider:|| Postal: Via Cosimo Ridolfi, 10 - 56124 PISA|
Phone: +39 050 22 16 466
Fax: +39 050 22 16 384
Web page: http://www.ec.unipi.it
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:pie:dsedps:2003/22. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.