Campus Units

Economics

Document Type

Article

Publication Version

Published Version

Publication Date

1998

Journal or Book Title

Macroeconomic Dynamics

Volume

2

Issue

2

First Page or Article ID Number

183

Last Page

212

Abstract

It is well known that the first welfare theorem can fail for overlapping generations economies with private production and unsecured debt. This paper demonstrates that the reason for this failure is that intermediation is modeled as a purely passive coordination activity implemented by a Walrasian Auctioneer. When intermediation is modeled instead as a contestable activity carried out by a corporate intermediary owned by consumer-shareholders and operated in their interest, every equilibrium is Pareto efficient. In broader terms, these findings caution that the inefficiency observed in standard modelings of overlapping generations economies may not be the reflection of an intrinsic market failure. Rather, the observed inefficiency could instead be due to a fundamental incompleteness in the model specification — the presumed inability of private agents to exploit the earnings opportunities associated with incurring and forever rolling over debt.

Comments

This is an article from Macroeconomic Dynamics 2 (1998): 183. Posted with permission.

Copyright Owner

Cambridge University Press

Language

en

File Format

application/pdf

Working Paper

Share

COinS