OVERLAPPING GENERATIONS MODEL,INVESTMENT FUNCTION AND DYNAMIC EFFICIENCY OF RESOURCE ALLOCATION*

This paper suggests that the possibility of dynamically inefficient resource allocation as pointed out by Diamond (1965) is due to the neoclassical property of that model where no investment instalment cost, and hence no investment function in the proper sense, may exist. If one introduces, instead, Tobin's q-theory type investment function, competitive equilibrium is shown to be consistent only with the dynamically efficient use of resources.