Imperfect Competition and Growth with Entrepreneurial Risk

Abstract. This paper analyzes an overlapping generations endogenous growth model of occupational choice under risk in a two-sector economy with intermediate and final goods. Agents choose between business ownership in the monopolistically competitive intermediate goods industry or employment as a worker in this sector. Firm-specific profits are stochastic. Occupational choice under risk endogenizes the number of firms and products in the intermediate goods industry. The analysis shows that economic performance and growth both depend on the entrepreneurship rate and are inefficiently low compared with an economy with perfect markets for pooling risks. Monopolistic competition partly offsets the negative income effects from a too low level of entrepreneurial risk-taking.     

Temporary bubbles

This article studies the dynamics of an overlapping generations model with capital, money and cash-in-advance constraints. The economy can exhibit two different regimes. In the first one, the cash-in-advance constraint is binding and money is a dominated asset. In the second one, the constraint is strictly satisfied and money has the same return as capital. When the second regime holds on a finite number of periods, we say that the economy experiences a temporary bubble. We prove that temporary bubbles can exist in an economy, which would experience under-accumulation without money. We also show that cyclical bubbles may occur.     

Growth,intergenerational welfare,and environmental policies in an overlapping generations economy

This paper examines the effects of the environmental tax on long‐run growth and intergenerational welfare in a discrete‐time overlapping generations (OLG ) model. We highlight that the role regarding how the environmental tax revenues are distributed between the young or old generations has important implications for the growth and welfare effects. Our results indicate that raising the environmental tax can exert different effects on the environmental utility of the existing young and old generations, implying an intergenerational welfare conflict of the environmental policy. However, if tax revenues are distributed appropriately, our numerical simulation shows that it is possible for a higher environmental tax to improve the welfare of all generations.     

On Sustainable Pay-as-You-Go Contribution Rules

An unfunded social security system faces the major risk, sometimes referred to as "political risk," that future generations do not agree to contribute as much as expected. In order to account properly for this risk, the paper considers a political process in which the support to the system is asked from each new born generation. The analysis is conducted in an overlapping generations economy that is subject to macroeconomic shocks. As a consequence, the political support varies with the evolution of the economy. The impact of various factors—intragenerational redistribution, risk aversion, financial markets, governmental debt—on the political sustainability of a pay-as-you-go system is discussed.     

Capital Accumulation in an Economy with Dynasties and Uncertain Lifetimes

This paper studies how the lack of an annuities market affects savings behavior and intergenerational transfers in a dynastic overlapping generations economy. I find that the answer to this question depends crucially on altruism. On the one hand, if the altruistic bequest motive is operative, then the lack of annuity markets enhances capital accumulation. On the other hand, if the altruistic bequest motive is not operative, the absence of annuity markets can either increase or decrease aggregate savings. I characterize under which conditions capital accumulation is enhanced. I also prove that an overlapping generations economy with altruism and uninsurable lifetime risk faces capital overaccumulation relative to the modified Golden Rule. The efficient allocation corresponding to the modified Golden Rule can be decentralized as a competitive equilibrium by a pay-as-you-go social security system, and this can only be done if individuals are altruistic.     

Indirect taxation and the welfare effects of altruism on the optimal fiscal policy

This paper analyzes the welfare effects of altruism on the optimal fiscal policy. The existence of positive bequests links present and future generations in the economy. We show that these altruistic links provide a new role for indirect taxation (consumption and estate taxes) with important welfare implications. We use three different altruistic approaches (warm-glow, dynastic, and family) to illustrate how the presence of bequests in the budget constraint of the donee gives the government the ability to use indirect taxation to mimic lump-sum taxes and to implement the first-best outcome in the long-run. This channel is not present in economies without altruism, such as the infinite-lived consumer economy or the overlapping generations economy, where long-run welfare is suboptimal and indirect taxation is irrelevant.     

Tractable graphical device for analyzing stationary stochastic OLG economies

This article develops a tractable graphical device for analyzing the stationary, stochastic overlapping generations economy. In this paper, the graphical device is applied to the theoretical study on stochastic bubbles per Weil (1987) and gives new insights into the issue.     

Rational expectations in the overlapping generations model

This paper reports results on the character of the rational expectations equilibria of a stochastic overlapping generations model with heterogenous markets. The model considered is a stationary overlapping generations model in which the endowments of young agents are subject to i.i.d. random shocks. The main result shown is that if there are l > 1 commodities traded in every period, then for most preferences, the rational expectations equilibrium stochastic process of prices and allocations necessarily exhibits serial correlation. This is in marked contrast to the one commodity model in which there always exists an equilibrium which is measure isomorphic to the endowment process.     

MACROECONOMIC AND REDISTRIBUTIONAL EFFECTS OF CONSUMPTION TAXES IN THE USA*

This paper studies the effect of an increase in consumption taxes using a dynamic general equilibrium model of overlapping generations calibrated to the US economy. When the proceeds are used to reduce income taxes, the reform raises the aggregate capital and labour supply in the long run. Workers increase labour supply immediately in response to the reform, while consumption rises only gradually. The tax reform also transfers wealth from old consumers to young consumers. As a result, while future generations experience significant welfare gains, current generations, particularly old consumers, tend to experience sizable welfare losses. When the proceeds are used for a lump‐sum transfer, the aggregate capital and labour both decrease in the long run. This reform is welfare‐improving for the current low‐income households.     

Selective immigration policy and its impacts on Canada's native‐born population: A general equilibrium analysis

This paper analyzes the effects of skilled immigration on the wage inequality between different education groups and the welfare of the incumbent population. I use a heterogenous agent overlapping generations model with endogenous discrete college education choice and calibrate it to match the features of 1981 Canadian economy. My quantitative analysis suggests that reducing the skilled immigration rate generates a rise in the growth rate of the wage inequality between college‐educated and non‐college workers. As skilled immigrants are admitted at a lower rate, more natives opt for college education in the economy. My welfare analysis shows that the incumbent young and college‐educated population benefits more from a reduction in the skilled immigration rate. On the other hand, young generations with below college education face welfare losses. My results suggest that skilled immigration contributes positively to the overall welfare in the economy.     

International Capital Movements In the Solow and Overlapping Generations Growth Models*

This paper examines capital movements in the overlapping generations and Solow models. For the overlapping generations model, a simple compensation scheme is developed to show how the gaining generation(s) can always compensate the losing generation(s) and still gain in the move from autarky to free capital mobility. Moreover, unlike the Solow model, the move to an open economy for the overlapping generations model has a tendency to reduce the assets held by the capital-exporting country.     

GROWTH AND BUBBLES WITH CONSUMPTION EXTERNALITIES*

This paper explores the role of consumption externalities in an overlapping generations economy with capital accumulation. If consumers in each generation are concerned with other agents’ consumption behaviours, there exist intergenerational as well as intragenerational consumption externalities. It is the presence of intergenreational consumption externalities that may produce fundamental effects both on equilibrium dynamics and on steady‐state characterization of the economy. This paper demonstrates this fact in the context of a simple model of endogenously growing, overlapping‐generations economy with or without asset bubbles.     

The trade-off between public debt reduction and automatic stabilisation

This paper addresses the basic tradeoff between the stabilisation properties of budgets and the sustainability of long run fiscal positions. The modeling framework consists of a simple non-monetary endowment economy with overlapping generations, extended to account for stochastic endowments and borrowing constrained households. A benign government chooses the optimal degree of responsiveness of net taxes to individual incomes and an optimal measure of long-run public debt in order to smooth households' consumption across states of nature. In the presence of a deficit constraint for the government, the results point to the desire for lower debt levels than those currently prevailing in European Union countries in order to enable a more effective hedging of personal income uncertainty by means of more active automatic fiscal stabilisers. The optimal degree of automatic stabilisation and debt reduction is conditional on the characteristics of economic cycles.     

Democratic public good provision

This paper analyzes an overlapping generation model of redistribution and public good provision under repeated voting. Expenditures are financed through age-dependent taxation that distorts human capital investment. Taxes redistribute income both across skill groups and across generations. We focus on politico-economic Markov equilibria and contrast these with the Ramsey allocation under commitment. The model features indeterminate equilibria, with a key role of forward-looking strategic voting. Due to the lack of commitment to future policies, the tax burden may be on the wrong side of the dynamic Laffer curve. Moreover, restrictions on government policies can in some cases be welfare improving.     

Capital Controls, Risk, and Liberalization Cycles

The paper presents an overlapping‐generations model where agents vote on whether to open or close the economy to international capital flows. Political decisions are shaped by the risk over capital and labor returns. In an open economy, the capitalists (old) completely hedge their savings income. In contrast, in a closed economy, the workers (young) partially insulate wages from the productivity shocks. There are three possible equilibrium outcomes: economies that eventually remain open; those that eventually remain closed; and those that cycle between open and closed. In line with the stylized facts, cycles are more common in economies with intermediate development levels.     

Technological progress and income inequality

Summary This paper examines the effects of Hicks-neutral, Harrod-neutral, and Solow-neutral technological improvements on the distribution of income in an overlapping generations economy with endogenous labor supply and a bequest motive. Income inequality in this model is generated by a stochastic process representing random variations in intergenerational transfers and pure luck. The comparative dynamics analysis trace the effects of the aforementioned technological changes in each and every period after they occur. These effects depend on the nature of the technological change and on the elasticity of substitution.We thank Carl Davidson, James Foster, and two anonymous referees for their useful comments.     

Endogenous Debt Constraints in Lifecycle Economies

We characterize competitive equilibria with perfect foresight in a deterministic, three-period pure-exchange overlapping generations economy with perfect information and no commitment to loan contracts. Commitment is replaced by an enforcement mechanism that excludes defaulters from asset markets for one period. For hump-shaped endowment profiles, young individuals face endogenous debt constraints that ration current consumption. Changes in current and future yields affect these constraints, inducing an additional income effect on rationed household demand that makes current and future consumption complements. This mechanism can lead to multiple steady states, persistent indeterminacy and regime switching. We show that sensitivity to shocks and complex dynamic behaviour are consistent with endogenous debt limits but not with exogenous liquidity constraints.     

ENDOGENOUS BUSINESS CYCLES: THE INFLUENCE OF CHARACTER TRAITS*

This article deals with how business cycles can occur, in light of character traits which influence individual behaviour in an economy. We assume an overlapping generations model in which every consumer has identical instantaneous utility which is additively separable with respect to time. The parameters of utility here include character traits which influence the choice between consumption and savings. In this situation, young individuals choose between current consumption and current savings which lead to future consumption in their old age. Individual character traits, which appear both in the shape of utility functions and in evaluations about utility in the future, affect these choices. And since these choices determine savings, individual character traits can eventually determine how our economy moves. Focusing on the relationship between individual character traits and savings formation, we demonstrate that endogenous business cycles with two periods can occur, in an economy comprised of individuals who opt for current consumption and who are careless in relation to future events, like Aesopian grasshoppers, and in other cases they do not.     

THE POLITICAL ECONOMY OF ENVIRONMENTAL POLICY WITH OVERLAPPING GENERATIONS

A two‐sector overlapping generations model illuminates the intergenerational effects of a tax that protects an environmental stock. A traded asset capitalizes the economic returns to future tax‐induced environmental improvements, benefiting the current asset owners, the old generation. Absent a transfer, the tax harms the young generation by decreasing their real wage. Future generations benefit from the tax‐induced improvement in environmental stock. The principal intergenerational conflict arising from the tax is between generations alive at the time society imposes the policy, not between generations alive at different times. A Pareto‐improving tax can be implemented under various political economy settings.     

Optimal limited authority for principal

This article studies a principal-agent problem where the only commitment for the uninformed principal is to restrict the set of decisions she makes following a report by the informed agent. We show that an ex ante optimal equilibrium for the principal corresponds to a finite partition of the state space, and each retained decision is ex post suboptimal for the principal, biased toward the agent?s preference. Generally an optimal equilibrium does not maximize the number of decisions the principal can credibly retain. Compared to no commitment, limited authority improves the quality of communication from the agent. As a result, it can give the principal a higher expected payoff than delegating the decision to the agent.