Overlapping generations , intermediation , and the First Welfare Theorem

The First Welfare Theorem fails to hold for standard pure exchange overlapping generations economies because no agent exploits the profit opportunities which can arise from mediating intertemporal trade. This paper modifies the standard economy by introducing an optimizing corporate intermediary which distributes net earnings back to consumer-shareholders. The Pareto inefficient no-trade state, which is a stationary equilibrium for the standard economy, cannot be an equilibrium for this modified ‘Brokerage Economy’ because the intermediary perceives unbounded earnings opportunities. If the intermediary seeks to maximize the minimum dividend per share distributed over time, then there is a unique Pareto efftcient stationary equilibrium for the Brokerage Economy.