Overlapping generations model: Difference between revisions

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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>, similiar to the logic described in the [[Hilbert Hotel]]. Not every equilibrium is inefficient; the efficiency of an equilibrium is strongly linked to the [[interest rate]] and the [[Cass Criterion]] gives [[necessary and sufficient condition]]s for when an OLG competitive equilibrium allocation is inefficient.<ref name="Cass72">{{cite journal | last1 = Cass| first1 = David | author-link=David Cass| year=1972 |title= On capital overaccumulation in the aggregative neoclassical model of economic growth: a complete characterization | journal =[[Journal of Economic Theory]] | volume = 4| pages = 200–223 | doi = 10.1016/0022-0531(72)90149-4 | issue = 2}}</ref>

Another attribute of OLG type models is that it is possible that '[[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}}