Overlapping Generations Models

The specific feature of the Overlapping Generations Model is that new cohorts are born in every period, live for a number of periods and die. Consequently, at any point in time, society is composed of individuals belonging to the different generations that are currently alive. Because of the demographic structure of the population, no trade involving individuals about to die is possible and hence markets per se cannot bring about an efficient allocation of the existing resources. This natural restriction on the working of the markets makes the OLG model to behave very differently from the General Equilibrium. Specifically, we have that: i) typically there exists a vast number of equilibria; ii) competitive equilibria may fail to be Pareto efficient; and iii) Pareto efficient competitive equilibria may not belong to the core of the economy. Further, the introduction of intrinsically worthless fiat money induces the appearance of Pareto superior equilibria, otherwise unreachable. Such intergenerational transfers can also be performed by means of taxes and pensions, public debt or other forms of public intervention. These features make clear that the parallelism between the OLG and the GE model is limited. In order to stress the properties specific to OLG economies we start by examining the simplest model possible. This is the canonical OLG model due to Samuelson. In the subsequent sections we present a detailed discussion of the most salient “anomalies” in a much more general model of a pure exchange economy. We examine first the main properties of competitive equilibria: existence, uniqueness and efficiency. Next we analyze the role of fiat money and the conditions for existence and efficiency of monetary equilibria. Finally, we address the issue of the trustworthiness of intergenerational (implicit) agreements. We conclude with some remarks on future research directions.