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Added citation to Acemoglu in dynamic efficiency & relation to the Hilbert Hotel paradox. |
Rather than creating a new page for over-saving, linked to page on global saving glut. |
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{{Short description|Framework in macroeconomics}}
{{For|the topic in population genetics|Overlapping generations}}
{{Macroeconomics sidebar}}
The '''overlapping generations''' ('''OLG''') '''model''' is one of the dominating frameworks of analysis in the study of [[macroeconomic]] dynamics and [[economic growth]]. In contrast
The OLG model is the natural framework for the study of: (a) the life-cycle behavior (investment in [[human capital]], work and [[Retirement plan|saving]] for [[retirement]]), (b) the implications of the [[resource allocation|allocation of resources]] across the generations, such as [[Social security|Social Security]], on the [[income per capita]] in the long-run,<ref>{{cite journal|last1=Imrohoroglu|first1=Selahattin|last2=Imrohoroglu|first2=Ayse|last3=Joines|first3=Douglas|year=1999|title=Social Security in an Overlapping Generations Economy with Land|journal=Review of Economic Dynamics|volume=2|issue=3|pages=638–665|doi=10.1006/redy.1999.0066}}</ref> (c) the determinants of economic growth in the course of human history, and (d) the factors that triggered the [[Demographic transition|fertility transition]].
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*Two generations are alive at any point in time, the young (age 1) and old (age 2).
*The size of the young generation in period t is given by N<sub>t</sub> = N<sub>0</sub> E<sup>t</sup>.
*Households work only in the first period of their life and earn Y<sub>1,t</sub> income. They earn no income in the second period of their life (Y<sub>2,t+1</sub> = 0).
*They consume part of their first period income and save the rest to finance their consumption when old.
*At the end of period t, the assets of the young are the source of the capital used for aggregate production in period t+1.So K<sub>t+1</sub> = N<sub>t,</sub>a<sub>1,t</sub> where a<sub>1,t</sub> is the assets per young household after their consumption in period 1. In addition to this there is no depreciation.
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== Dynamic inefficiency ==
One important aspect of the OLG model is that the steady state equilibrium need not be efficient, in contrast to general equilibrium models where the [[Fundamental theorems of welfare economics|first welfare theorem]] guarantees [[Pareto efficiency]]. Because there are an infinite number of agents in the economy (summing over future time), the total value of resources is infinite, so Pareto improvements can be made by transferring resources from each young generation to the current old generation,<ref>{{Cite book |last=Acemoglu |first=Daron |title=Introduction to modern economic growth |date=2009 |publisher=Princeton University Press |isbn=978-0-691-13292-1 |___location=Princeton, New Jersey Oxford}}</ref>
Another attribute of OLG type models is that it is possible that '[[Global saving glut|over saving]]' can occur when [[capital accumulation]] is added to the model—a situation which could be improved upon by a social planner by forcing households to draw down their capital stocks.<ref name="Diamond65">{{cite journal | last1 = Diamond| first1 = Peter | author-link=Peter Diamond| year=1965 |title= National debt in a neoclassical growth model | journal =[[American Economic Review]] | volume = 55| pages = 1126–1150 | issue = 5}}</ref> However, certain restrictions on the underlying technology of production and consumer tastes can ensure that the steady state level of saving corresponds to the [[Golden Rule savings rate]] of the [[Solow growth model]] and thus guarantee intertemporal efficiency. Along the same lines, most empirical research on the subject has noted that oversaving does not seem to be a major problem in the real world.{{Citation needed|date=May 2012}}
In Diamond's version of the model, individuals tend to save more than is socially optimal, leading to [[Dynamic efficiency|dynamic inefficiency]]. Subsequent work has investigated whether dynamic inefficiency is a characteristic in some economies<ref name="Mankiw89">{{cite journal|title=Assessing Dynamic Efficiency: Theory and Evidence|author1=N. Gregory Mankiw|date=1 May 1989|journal=[[Review of Economic Studies]]|author2=Lawrence H. Summers|issue=1|volume=56|pages=1–19|doi=10.2307/2297746|author3=Richard J. Zeckhauser|jstor=2297746}}</ref> and whether government programs to transfer wealth from young to poor do reduce dynamic inefficiency{{Citation needed|date=November 2014}}.
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