# Active Intermediation in a Monetary Overlapping Generations Economy''

## Author Info

• Mark Pingle

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

• Leigh Tesfatsion

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

Registered author(s):

## Abstract

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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File URL: http://128.118.178.162/eps/mac/papers/9312/9312001.tex

File URL: http://128.118.178.162/eps/mac/papers/9312/9312001.pdf

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## Bibliographic Info

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

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 Length: 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 Contact details of provider: Web page: http://128.118.178.162

## References

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1. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
2. 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.
3. 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.
4. 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.
5. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
6. repec:cup:cbooks:9781107003491 is not listed on IDEAS
7. Grandmont Jean-michel, 1983. "On endogenous competitive business cycles," CEPREMAP Working Papers (Couverture Orange) 8316, CEPREMAP.
8. Pingle, Mark & Tesfatsion, Leigh, 1991. "Overlapping generations, intermediation, and the First Welfare Theorem," Journal of Economic Behavior & Organization, Elsevier, vol. 15(3), pages 325-345, May.
9. Bryant, John, 1981. "Bank Collapse and Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 13(4), pages 454-64, November.
10. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
11. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
12. 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.
13. GRANDMONT, Jean-Michel & LAROQUE, Guy, . "Money in the pure consumption loan model," CORE Discussion Papers RP -152, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
14. 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.
15. Williamson, Stephen D., 1992. "Laissez-faire banking and circulating media of exchange," Journal of Financial Intermediation, Elsevier, vol. 2(2), pages 134-167, June.
16. 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.
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