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``Active Intermediation in a Monetary Overlapping Generations Economy''

  • Mark Pingle

    (Department of Economics, University of Nevada, Reno, NV 89557)

  • Leigh Tesfatsion

    (Department of Economics, Iowa State University, Ames, IA 50011-1070)

It is now widely believed that government intervention is essential to ensure Pareto efficiency in the standard overlapping generations economy with nonaltruistic agents. This paper argues that the normal profit-seeking activities of {\it private intermediaries\/}---missing from the standard overlapping generations economy---would tend to eliminate the need for such government intervention. A private earnings-driven corporate intermediary is introduced into a standard monetary overlapping generations economy which, in the absence of the intermediary, generates Pareto inefficient equilibria. The intermediary issues unsecured corporate debt and maximizes its market value in direct accordance with the interests of its successive shareholders. The significant impact of private intermediation is demonstrated by establishing that all equilibria for the resulting ``Corporate Economy'' are Pareto efficient. Dynamic properties of equilibrium paths are also determined. It is shown, for example, that endogenous cyclic equilibria are possible for the Corporate Economy in the absence of gross substitutability.

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Paper provided by EconWPA in its series Macroeconomics with number 9312001.

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Date of creation: 04 Dec 1993
Date of revision: 04 Dec 1993
Handle: RePEc:wpa:wuwpma:9312001
Note: 32 Pages of Text, Plus a Ten Page Appendix and Two Figures, all in ONE LaTeX file
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  1. 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.
  2. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
  3. 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.
  4. Bryant, John, 1981. "Bank Collapse and Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(4), pages 454-64, November.
  5. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
  6. 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.
  7. Williamson, Stephen D., 1992. "Laissez-faire banking and circulating media of exchange," Journal of Financial Intermediation, Elsevier, vol. 2(2), pages 134-167, June.
  8. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
  9. 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.
  10. 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.
  11. Grandmont, Jean-Michel, 1985. "On Endogenous Competitive Business Cycles," Econometrica, Econometric Society, vol. 53(5), pages 995-1045, September.
  12. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
  13. Kane, Edward J, 1989. "The High Cost of Incompletely Funding the FSLIC Shortage of Explicit Capital," Journal of Economic Perspectives, American Economic Association, vol. 3(4), pages 31-47, Fall.
  14. Grandmont, Jean-Michel & Laroque, Guy, 1973. "Money in the pure consumption loan model," Journal of Economic Theory, Elsevier, vol. 6(4), pages 382-395, August.
  15. 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.
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