Showing papers on "Overlapping generations model published in 2012"

Middle-Income Growth Traps

Abstract: This paper studies the existence of middle-income growth traps in a two-period overlapping generations model of economic growth with two types of labor and endogenous occupational choices. It also distinguishes between "basic" and "advanced" infrastructure, with the latter promoting design activities, and accounts for a knowledge network externality associated with product diversification. Multiple steady-state equilibria may emerge, one of them taking the form of a low-growth trap characterized by low productivity growth and a misallocation of talent -- defined as a relatively low share of high-ability workers in design activities. Improved access to advanced infrastructure may help escape from that trap. The implications of other public policies, including the protection of property rights and labor market reforms, are also discussed.

Private Investment in Higher Education: Comparing Alternative Funding Schemes

Abstract: This paper uses an overlapping generations framework to analyse the implications of different financing regimes in the education sector for human capital formation and economic welfare Agents privately invest in education after they have received a noisy information signal about their abilities The incentives of individuals to invest in education are determined by the financing regime under which the economy operates We analyse and compare three financing regimes Under each regime, the payback obligation of an educational loan is contingent, to some extent, on an individual's future income

Envy and Inequality

Abstract: We present an overlapping generations economy, populated by heterogeneous agents who care about both consumption relative to others and the bequest they leave to their offspring. We show that saving and bequest rates vary across the income distribution, and we obtain several interesting results. First, envy reduces the steady-state capital stock and increases the degree of inequality in consumption, capital ownership, and bequests. Second, if the bequest motive is sufficiently strong the equalizing effect of bequests disappears. Third, income inequality for a given cohort increases with age. Fourth, the distribution of inherited wealth becomes more unequal than that of wealth in general. Fifth, economic position becomes more persistent across generations.

Fertility and PAYG pensions in the overlapping generations model

Abstract: This article analyses how long-run pay-as-you-go public pensions react to a change in fertility in the Diamond overlapping generations model. While it might seem well established both in academic and political debates that the decline in fertility represents a “demographic time bomb” for the sustainability of public pensions, it is shown that a falling birth rate need not necessarily cause the fall of pensions in the long run.

A politico-economic model of aging, technology adoption and growth

Abstract: This paper provides a politico-economic theory that explains how an economy evolves when the longevity of its citizens is jointly determined with the process of economic development. We propose a three-period overlapping generation model where agents’ decisions embrace two dimensions: a private choice about education and a public one on innovation policy. We find that (a) poverty traps can emerge in human capital accumulation, (b) higher life expectancy increases the incentive to innovate for both young and adults, (c) different political configurations can arise depending on endogenous demographic structures and (d) the steady state can entertain both innovation and its absence.

Trade Retaliation in a Monetary-Trade Model

Abstract: We explore how outcomes of trade policy retaliation (Nash tariff games) are affected when trade simultaneously takes places geographically across countries and through time via financial intermedia...

Labor Income Taxation, Human Capital, and Growth: The Role of Childcare*

Abstract: In this paper, we examine the effects of labor income taxation on growth in an overlapping generations model in which schooling and childcare play a role in the production of human capital. We compare such effects with those obtained in a model in which only schooling matters for skill formation. We show that the omission of childcare from the technology of skill formation can bias the results related to the impact of labor income taxation on growth.

Pension reform with variable retirement age: a simulation analysis for Germany*

Abstract: The paper analyzes the recent pension reform in Germany which increases the normal retirement age by two years. The applied simulation model features a realistic demographic transition, distinguishes three skill classes with different life expectancies and allows individuals to choose their labor supply at the intensive and the extensive margin.Our simulation results indicate that under the existing pension rules long-run contribution rates and old-age poverty rates will increase considerably. The proposed rise in the normal retirement age will postpone effective retirement by about one year and redistribute towards future cohorts. A stronger delay in effective retirement may be achieved by raising the actuarial adjustment of benefits.

Life Expectancy, Labor Supply, and Long-Run Growth: Reconciling Theory and Evidence

Abstract: We set up a simple overlapping generation model that allows us to distin- guish between life expectancy and active life expectancy We show that individuals optimally adjust to a longer active life by educating more and, if the labor supply elasticity is high enough, by supplying less labor When calibrated to US data the model explains the historical evolution of increasing education and declining labor supply (of cohorts born 1850-1950) as an optimal response to increasing active life expectancy We integrate the theory into a unified growth model and reestablish increasing life expectancy as an engine of long-run economic development

On welfare criteria and optimality in an endogenous growth model

Abstract: In this paper, we explore the consequences for optimality of a social planner adopting two different welfare criteria. The framework of analysis is an overlapping generations model with physical and human capital. We first show that, when the social welfare function is a discounted sum of individual utilities defined over consumption per unit of natural labor, the precise cardinalization of the individual utility function becomes crucial for both the characterization of the social optimum and the policies that support it. Also, decentralizing the social optimum requires an education subsidy that is definitely positive, but its size depends in a determinant way on the aforementioned cardinalization. In contrast, when the social welfare function is a discounted sum of individual utilities defined over consumption per unit of efficient labor, the precise cardinalization of preferences becomes irrelevant. More strikingly, along the optimal growth path, the education subsidy is negative, i.e., the planner should tax rather than subsidize investments in human capital.

Social Security, Growth, and Welfare in Overlapping Generations Economies With or Without Annuities

Abstract: We examine the impact of a stylized pay-as-you-go (PAYGO) Social Security program in an economy of overlapping generations with equilibrium growth. We adopt realistic mortality and other demographic assumptions and allow for the presence or absence of full life annuities. In all cases we find that steady state economies with PAYGO Social Security programs grow more slowly than those without. Also, we find that, for steady state economies having the same wage rate at the current time, initial all-inclusive wealth and lifetime expected utility are lower for households newly entering the economy with Social Security, and for all households subsequent. Growth and welfare are lower in economies without annuities, but the quantitative impact depends on how the financial wealth of decedents is distributed across the surviving population. With or without annuities, the presence of a PAYGO Social Security program reduces growth and welfare.

Financial Innovation and Asset Price Volatility

Abstract: We compare asset prices in an overlapping generations model for incomplete and complete markets. Individuals within a generational cohort have heterogeneous beliefs about future states of the economy and thus would like to make bets against each other. In the incomplete-markets economy, agents cannot make such bets. Asset price volatility is very small. The situation changes dramatically when markets are completed through financial innovations as the set of available securities now allows agents with different beliefs to place bets against each other. Wealth shifts across agents and generations. Such changes in the wealth distribution lead to substantial asset price volatility.

Middle-income growth traps

Abstract: This paper studies the existence of middle-income growth traps in a two-period overlapping generations model of economic growth with two types of labor and endogenous occupational choices. It also distinguishes between"basic"and"advanced"infrastructure, with the latter promoting design activities, and accounts for a knowledge network externality associated with product diversification. Multiple steady-state equilibria may emerge, one of them taking the form of a low-growth trap characterized by low productivity growth and a misallocation of talent -- defined as a relatively low share of high-ability workers in design activities. Improved access to advanced infrastructure may help escape from that trap. The implications of other public policies, including the protection of property rights and labor market reforms, are also discussed.

Economic Development and the Organization of Production

Abstract: How important is managerial talent in accounting for cross country income differences? We address this question using a model that distinguishes between workers human capital and managers human capital. In our model, the ablest people leverage their talent and this has important consequences for a country’s standard of livings. A key object for the existing literature argument is the returns to schooling. Once we distinguish between workers and managers: returns to schooling appear as profits rather than wages. We consider an overlapping generations economy where each individual chooses to be a manager or a worker depending on its human capital (as in Lucas, 1978), individual accumulate human capital both in school and on the job (as in Ben-Porath, 1967), and production occurs in teams where there is sorting between workers and managers (as in Garicano and Rossi-Hansberg, 2006). By nesting a model of managerial occupational choice and endogenous skill accumulation in a framework in which the span of control is endogenous, we develop a rich framework that yields a number of empirical implications. We find that (1) aggregate output is more sensitive to managerial talent than worker talent, (2) the span of control of managers is constrained by workers human capital, and (3) small variations in human capital can have large effects on wages and profits so that incentives to accumulate human capital at the top of the distribution are large. We calibrate the model to the US economy and show that it can rationalize simultaneously the life-cycle of wages of managers and workers as well as the life-cycle of firms. We then ask how much variations do we need to account for output per capita differences? Preliminary results show that modest distortions can lead to large income differences.

Microeconomic Implications of Remittances in an Overlapping Generations Model with Altruism and a Motive to Receive Inheritance

Abstract: The article develops a framework to examine the interaction between the migrant and the remittance-receiving relative(s) under non-cooperative and cooperative scenarios. The model has an overlappin...

Access to Infrastructure and Women’s Time Allocation: Evidence and a Framework for Policy Analysis

Abstract: This paper studies the interactions between access to infrastructure, women’s time allocation, and economic growth in developing countries. The first part provides a review of the evidence on the impact of poor infrastructure on women’s ability to allocate their time to productive activities. The second part presents a quantitative framework for policy analysis, in the form of a gender-based, computable overlapping generations (OLG) model of economic growth that captures these interactions as well as of inter- and intra-generational health externalities. The model is then calibrated for a low-income country (Benin) and used to quantify the impact of a policy aimed at improving access to infrastructure on women’s time allocation, growth and education and health outcomes. Implications of the analysis for strengthening the role of women in the growth process in developing economies are also discussed.Revised version November 2013

Credit Constraints and Growth in a Global Economy

Abstract: In a period of rapid integration and accelerated growth in emerging markets, three striking trends have been (1) a divergence in the private saving rates of emerging markets and advanced economies, (2) large net capital outflows from emerging markets, and (3) a sustained decline in the world interest rate. This paper shows that in a multi-period OLG model, the interaction between growth and household credit constraints --- more severe in emerging markets --- is able to account for all of the above facts. We provide micro-level evidence that corroborates our mechanism: saving behaviors across age groups in the U.S. and China are broadly supportive of the predictions of the model.

Different demographic changes and patterns of trade in a Heckscher–Ohlin setting

Abstract: We examine the effects of different aging speeds on international trade patterns in an open overlapping generations model. An expansion in life expectancy of a country does not necessarily make the country a net exporter of capital-intensive goods when fertility is endogenous, depending on the relative magnitudes of the positive Rybczynski effect of changes in the factor endowments and the negative effect from the consumption–savings choice on the relative price in the autarkic steady state. The incidence of gains from trade among generations after opening trade depends on whether the country becomes a net exporter or importer of capital-intensive goods.

The Impact of Population Ageing on the Labour Market: Evidence from Overlapping Generations Computable General Equilibrium (OLG-CGE) Model of Scotland

Abstract: This paper presents a dynamic Overlapping Generations Computable General Equilibrium (OLG-CGE) model of Scotland. The model is used to examine the impact of population ageing on the labour market. More specifically, it is used to evaluate the effects of labour force decline and labour force ageing on key macro-economic variables. The second effect is assumed to operate through age-specific productivity and labour force participation. In the analysis, particular attention is paid to how population ageing impinges on the government expenditure constraint. The basic structure of the model follows in the Auerbach and Kotlikoff tradition. However, the model takes into consideration directly age-specific mortality. This is analogous to “building in” a cohort-component population projection structure to the model, which allows more complex and more realistic demographic scenarios to be considered.

Intergenerational Implications of Fiscal Consolidation in Japan

Abstract: In Japan, intergenerational inequality in lifetime resources is substantial, with a heavier fiscal burden on the young than the old. Moreover, given the need for fiscal consolidation, the inequality is even worse than existing policy would suggest. However, this does not mean that fiscal consolidation would make the young worse off. Lack of fiscal consolidation would eventually increase interest rates, which would reduce output and hit young generations harder. Simulations using an overlapping generations model indicate that, from the perspective of intergenerational fairness, it would be desirable to include both social security spending reforms and revenue measures in a fiscal consolidation package. The simulations also show that delaying fiscal consolidation could be costly and worsen intergenerational resource inequality.

Game Over: Simulating Unsustainable Fiscal Policy

Abstract: Fiscal sustainability is one of the most pressing policy issues of our time. Yet it remains difficult to quantify. Official debt is plagued with a number of measurement difficulties since its measurement reflects the choice of words, not policies. And forming the fiscal gap-the imbalance in the government's intertemporal budget-requires strong discount rate assumptions. An alternative approach, taken here, is specifying a stochastic general equilibrium model and determining via simulation how long it takes for the economy to reach game over-the point where current policy can no longer be maintained. Our simulations, based on an OLG model calibrated to the U.S. economy, produce an average duration to game over of roughly one century, with a 35 percent chance of reaching the fiscal limit in roughly 30 years. The prospect of man-made economic collapse produces large equity premia, like those observed in the data. Our simulations show that both the fiscal gap and the equity premium rise as the economy gets closer to hitting its fiscal limit, suggesting that the fiscal gap and the equity premium may be good indicators of unsustainable policy.

Wealth Inequality, Stock Market Participation, and the Equity Premium

Abstract: The last 30 years saw substantial increases in wealth inequality and in stock market participation, smaller increases in consumption inequality and the fraction of indebted households, a decline in interest rates and in the expected equity premium, as well as a prolonged stock market boom. Understanding the causes of these trends is crucial for many questions in finance and economics. In an incomplete markets, overlapping generations model we show that these trends can be jointly explained by the observed rise in wage inequality, as well as a decrease in participation costs and a loosening of borrowing constraints. Once we account for these changes, we show that the observed pattern of stock prices played a major role in increasing wealth inequality because stockholders, who tend to be wealthy, benefit most from a bull market. Crucially, these phenomena must be considered jointly; studying one independently leads to counterfactual predictions about others. For example, a loosening of credit standards is expected to raise, rather than lower interest rates through decreased precautionary savings as well as vastly increase the fraction of households in debt; an increase in labor inequality is (somewhat counterintuitively) expected to lower rather than raise wealth inequality, again through precautionary savings; increased stock market participation should also lower wealth inequality.

Paul Samuelson's Legacy

Abstract: Paul Samuelson is probably the most important economist of the second half of the twentieth century. His research publications; his introductory textbook; his articles on topical questions of economic policy; and his interactions with numerous students, colleagues, policy makers, and the wider public have all contributed to fundamental changes in economics as a science and as a profession. This article attempts to give a brief overview of his career spanning eight decades and to recapitulate and celebrate his legacy.

Trading Off Generations: Infinitely-Lived Agent Versus OLG

Abstract: The prevailing literature discusses intergenerational trade-offs in climate change predominantly in terms of the Ramsey equation relying on the infinitely lived agent model. We discuss these trade-offs in a continuous time OLG framework and relate our results to the infinitely lived agent setting. We identify three shortcomings of the latter: First, underlying normative assumptions about social preferences cannot be deduced unambiguously. Second, the distribution among generations living at the same time cannot be captured. Third, the optimal solution may not be implementable in overlapping generations market economies.