It is well known that the first welfare theorem fails for the pure exchange^overlapping generations economy studied by Samuelson (1958) and for the private production overlapping generations economy studied by Diamond (1965). Tirole (1985) combines and extends the Samuelson and Diamond frameworks by permitting both unsecured debt and private pro duction and shows that the first welfare theorem stillfails to hold. This paper shows that the reason for this failure is that intermediation is niodelled as a purely passive coordination ac tivity implemented by a Walrasian Auctioneer.
This report has been published in Macroeconomic Dynamics / Volume 2 / Issue 02 / June 1998, pp 183-212, 1998 Cambridge University Press
Pingle, Mark and Tesfatsion, Leigh, "Active Intermediation in Overlapping Generations Economies with Production and Unsecured Debt" (1997). ISU Economic Report Series. 43.