Overlapping generations model: Difference between revisions

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{{For|the topic in population genetics|Overlapping generations}}

AnThe '''overlapping generations (OLG) model''' is one of the dominating frameworks of analysis in the study of macroeconomic dynamics and economic growth. In contrast, to the  [[Ramsey–Cass–Koopmans model|Ramsey–Cass–Koopmans neoclassical growth model]] in which individuals are infinitely-lived, in the OLG model individuals live a finite length of time, long enough to overlap with at least one period of another agent's life.

The OLG model is the natural framework for the study of: (a) the study of life-cycle behavior (investment in human capital, work and saving for retirement), (b) the implications of the 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}}</ref> (c) the determinates of economic growth in the course of human history, and (d) the factors that triggered the fertility transition.

OLG models allow us to look at intergenerational redistribution and systems.<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}}</ref>

== History ==

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*The old in period t own the entire capital stock and consume it entirely, so dissaving by the old in period t is given by N_t-1_,a₁_,_t-1 = K_t.

*Labor and capital markets are perfectly competitive and the aggregate production technology is CRS, Y = F(K,L).

In Diamond's version of the model, individuals tend to save more than is socially optimal, leading to dynamic inefficiency. Subsequent work has investigated whether dynamic inefficiency is a characteristic in some economies<ref name="Mankiw89">{{cite news|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}}</ref> and whether government programs to transfer wealth from young to poor do reduce dynamic inefficiency{{Citation needed|date=November 2014}}.

=== The Two-Sector OLG Model ===

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=== The OLG Model with Endogenous Fertility ===

Oded Galor and his co-authors develop OLG models where population growth is endogenously determined to explore: (a) the importance the narrowing of the gender wage gap infor the fertility decline,<ref name=":1" /> (b) the contribution of the rise in the return to human capital and the decline in fertility to the transition from stagnation to growth,<ref name=":2" /><ref>{{Cite journal|last=Galor|first=Oded|last2=Moav|first2=Omer|date=2002|title=Natural selection and the origin of economic growth|url=|journal=The Quarterly Journal of Economics|volume=117|issue=4|pages=1133-1191|via=}}</ref> and (c) the importance of population adjustment to technological progress for the emergence of the [[Malthusian trap]].<ref>{{Cite journal|last=Ashraf|first=Quamrul|last2=Galor|first2=Oded|date=2011|title=Dynamics and stagnation in the Malthusian epoch|url=|journal=American Economic Review|volume=101|issue=5|pages=2003-2041|via=}}</ref>

== Dynamic Inefficiency ==

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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 | authorlink=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 inefficiency. Subsequent work has investigated whether dynamic inefficiency is a characteristic in some economies<ref name="Mankiw89">{{cite news|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}}</ref> and whether government programs to transfer wealth from young to poor do reduce dynamic inefficiency{{Citation needed|date=November 2014}}.

A third fundamental contribution of OLG models is that they justify existence of money as a medium of exchange. A system of expectations exists as an equilibrium in which each new young generation accepts money from the previous old generation in exchange for consumption. They do this because they expect to be able to use that money to purchase consumption when they are the old generation.<ref name="LjungqvistSargent2004"/>

A thirdAnother fundamental contribution of OLG models is that they justify existence of money as a medium of exchange. A system of expectations exists as an equilibrium in which each new young generation accepts money from the previous old generation in exchange for consumption. They do this because they expect to be able to use that money to purchase consumption when they are the old generation.<ref name="LjungqvistSargent2004" />

==See also==