| Abstract: | I analyze how public debt restores Pareto efficiency in overlapping-generations economies. My model allows non-stationarity across time and accommodates many heterogeneous and multiperiod lived agents per generation and goods per period. I show that efficiency can always be restored by a once-and-for-all augmentation of initial wealth (the introduction of debt) partially financed by a series of ‘small’ taxes (the summation of average tax rates being less than any prescribed tolerance). I reconcile this positive result with well-known counter-examples. To establish my general proposition, I extend to my model Cass' well-known price characterization of efficiency. |
