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Active Intermediation In Overlapping Generations Economies With Production And Unsecured Debt

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  • Pingle, Mark
  • Tesfatsion, Leigh
Abstract
It is well known that the first welfare theorem can fail for overlapping generations economies with private production and unsecured debt. This paper demonstrates that the reason for this failure is that intermediation is modeled as a purely passive coordination activity implemented by a Walrasian Auctioneer. When intermediation is modeled instead as a contestable activity carried out by a corporate intermediary owned by consumer-shareholders and operated in their interest, every equilibrium is Pareto efficient. In broader terms, these findings caution that the inefficiency observed in standard modelings of overlapping generations economies may not be the reflection of an intrinsic market failure. Rather, the observed inefficiency could instead be due to a fundamental incompleteness in the model specification — the presumed inability of private agents to exploit the earnings opportunities associated with incurring and forever rolling over debt.

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  • Pingle, Mark & Tesfatsion, Leigh, 1998. "Active Intermediation In Overlapping Generations Economies With Production And Unsecured Debt," Macroeconomic Dynamics, Cambridge University Press, vol. 2(2), pages 183-212, June.
    • Handle: RePEc:cup:macdyn:v:2:y:1998:i:02:p:183-212_00
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    References listed on IDEAS

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    Cited by:

    1. Tesfatsion, Leigh, 2006. "Agent-Based Computational Modeling and Macroeconomics," ISU General Staff Papers 200601010800001585, Iowa State University, Department of Economics.
    2. Magill, Michael & Quinzii, Martine, 2003. "Nonshiftable capital, affine price expectations and convergence to the Golden Rule," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 239-272, June.
    3. Michael Magill & Martine Quinzii, "undated". "The Stock Market in the Overlapping Generations," Department of Economics 99-13, California Davis - Department of Economics.
    4. Kim, Jae Kyeong, 1997. "Social security trust fund (SSTF), the government fiscal use of the SSTF, and intergenerational equity," ISU General Staff Papers 1997010108000012996, Iowa State University, Department of Economics.

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    More about this item

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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