Showing papers on "Overlapping generations model published in 2015"
TL;DR: This paper study the implications of preference heterogeneity for asset pricing and find that separating intertemporal elasticity of substitution and risk aversion heterogeneity can have a substantive impact on the model's ability to address some key asset-pricing issues.
Abstract: We study the implications of preference heterogeneity for asset pricing. We use recursive preferences in order to separate heterogeneity in risk aversion from heterogeneity in the intertemporal elasticity of substitution and an overlapping-generations framework to obtain a nondegenerate stationary equilibrium. We solve the model explicitly up to the solutions of ordinary differential equations and highlight the effects of overlapping generations and each dimension of preference heterogeneity on the market price of risk, interest rates, and the volatility of stock returns. We find that separating intertemporal elasticity of substitution and risk aversion heterogeneity can have a substantive impact on the model’s (qualitative and quantitative) ability to address some key asset-pricing issues.
101 citations
TL;DR: In this paper, the authors analyze intergenerational redistribution in emerging economies with the aid of an overlapping generations model with endogenous labor supply, and a version of the model calibrated to China is used to analyze the welfare effects of alternative pension reforms.
Abstract: We analyze intergenerational redistribution in emerging economies with the aid of an overlapping generations model with endogenous labor supply. Growth is initially high but declines over time. A version of the model calibrated to China is used to analyze the welfare effects of alternative pension reforms. Although a reform of the current system is necessary to achieve financial sustainability, delaying its implementation implies large welfare gains for the (poorer) current generations, imposing only small costs on (richer) future generations. In contrast, a fully funded reform harms current generations, with small gains to future generations.
96 citations
TL;DR: In this article, the evolution of a social norm of "cooperation" in a dynamic environment is studied, where each agent lives for two periods and interacts with agents from the previous and next generations via a coordination game.
Abstract: We study the evolution of a social norm of “cooperation” in a dynamic environment. Each agent lives for two periods and interacts with agents from the previous and next generations via a coordination game. Social norms emerge as patterns of behaviour that are stable in part due to agents' interpretations of private information about the past, influenced by occasional commonly observed past behaviours. For sufficiently backward-looking societies, history completely drives equilibrium play, leading to a social norm of high or low cooperation. In more forward-looking societies, there is a pattern of “reversion” whereby play starting with high (low) cooperation reverts towards lower (higher) cooperation. The impact of history can be countered by occasional “prominent” agents, whose actions are visible by all future agents and who can leverage their greater visibility to influence expectations of future agents and overturn social norms of low cooperation
95 citations
TL;DR: The authors showed that the interaction between growth differentials and household credit constraints, more severe in fast growing countries, can explain three prominent global trends: a divergence in private saving rates between advanced and emerging economies, large net capital outflows from the latter, and a sustained decline in the world interest rate.
Abstract: We show that in an open-economy OLG model, the interaction between growth differentials and household credit constraints, more severe in fast-growing countries, can explain three prominent global trends: a divergence in private saving rates between advanced and emerging economies, large net capital outflows from the latter, and a sustained decline in the world interest rate. Micro-level evidence on the evolution of age-saving profiles in the U.S. and China corroborates our mechanism. Quantitatively, our model explains about 40 percent of the divergence in aggregate saving rates, and a significant portion of the variations in age-saving profiles across countries and over time.
70 citations
TL;DR: In this paper, the authors define sustainability in terms of leaving it possible for future generations to sustain certain defined targets, and show that variants of genuine savings and the ecological footprint can then serve as indicators of sustainability.
68 citations
15 Jan 2015
61 citations
TL;DR: In this paper, a computable overlapping generations model was developed to explore the effect of population aging on economic growth in Korea, which showed that population aging causes a decrease in labor supply growth and an increase in capital stock growth, thus yielding capital deepening.
52 citations
TL;DR: The authors investigated public education and tax policies as a possible source for these differences and found that taxes and public education spending account for about one-third of the differences in earnings inequality and 14 percent of differences in intergenerational earnings persistence between the U.S. and Norway.
46 citations
TL;DR: In this article, the authors investigated the relationship between East Asian countries' high propensity to save and global imbalances in a two-country OLG model with production, and found that the higher is the percentage of the working population covered by the pay-as-you-go system the lower are savings and the current account balance in a cross-section of countries.
42 citations
TL;DR: In this paper, the impact of aging on capital accumulation and welfare in a country with a sizable unfunded social security system was analyzed using a two-period overlapping generation model with endogenous retirement decisions.
Abstract: This paper analyzes the impact of aging on capital accumulation and welfare in a country with a sizable unfunded social security system. Using a two-period overlapping generation model with endogenous retirement decisions, the paper shows that the type of aging and the type of unfunded social security system are important in understanding this impact. The analysis compares two types of demographic changes, declining fertility and increasing longevity; three types of pensions, defined contributions, defined benefits, and defined annuities; as well as mandatory and optimal retirement systems to investigate the differences in implications of aging.
39 citations
TL;DR: In this article, a specific application of the environmental Kuznets curve (EKC) in order to explain the effect of population growth on the environment was provided. But the main purpose is contributing to enhance the connection between theoretical and empirical analysis.
TL;DR: In this article, the authors show that the optimality of a high capital income tax rate along the transition crucially depends on the assumption of a utilitarian social welfare function and develop a general and coherent way of aggregating welfare effects of different individuals and cohorts in the short and long run.
TL;DR: In this paper, the aging population projected by the US Social Security Administration to a heterogeneous-agent OLG model with idiosyncratic wage shocks and analyzed its effects on individual households, the government budget, and the overall economy.
TL;DR: Growth dynamics and health outcomes are studied in a three-period overlapping generations model with public capital, which suggests a reallocation of public spending toward either health or infrastructure may put the economy on a convergent path to a high-growth, high productivity steady state.
Abstract: Growth dynamics and health outcomes are studied in a three-period overlapping generations model with public capital. Agents face a non-zero probability of death in adulthood. Parental health affects the health status of their children at birth, and health status in adulthood depends on health in childhood. An autonomous increase in life expectancy has an ambiguous impact on growth, because of an adverse effect on the public–private capital ratio. If life expectancy depends endogenously on health status, multiple equilibria may emerge. A reallocation of public spending toward either health or infrastructure may put the economy on a convergent path to a high-growth, high productivity steady state. However, escaping from a health-induced poverty trap can occur only if the quality of public spending is sufficiently high.
TL;DR: In this article, the authors study the welfare consequences of tax the rent on a fixed production factor, such as land, in combination with age-dependent redistributions as a remedy.
Abstract: Imperfect altruism between generations may lead to insufficient capital accumulation. We study the welfare consequences of taxing the rent on a fixed production factor, such as land, in combination with age-dependent redistributions as a remedy. Taxing rent enhances welfare by increasing capital investment. This holds for any tax rate and recycling of the tax revenues except for combinations of high taxes and strongly redistributive recycling. We prove that specific forms of recycling the land rent tax --- a transfer directed at fundless newborns or a capital subsidy --- allow reproducing the social optimum under parameter restrictions valid for most economies.
TL;DR: In this paper, the authors build an overlapping generations model in which reproductive households face a child quantity-child quality trade-off and bureaucrats are delegated with the task of delivering public services that support the accumulation of human capital.
Abstract: We build an overlapping generations model in which reproductive households face a child quantity–child quality trade-off and bureaucrats are delegated with the task of delivering public services that support the accumulation of human capital. By integrating the theoretical analyses of endogenous growth, corruption and fertility choices, we show that the negative relation between fertility and economic development may also be affected by differences in the magnitude of bureaucratic corruption.
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TL;DR: This paper proposed an overlapping generations New Keynesian model in which a permanent (or very persistent) slump is possible without any self-correcting force to full employment, which sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession.
Abstract: We propose an overlapping generations New Keynesian model in which a permanent (or very persistent) slump is possible without any self- correcting force to full employment. The trigger for the slump is a deleveraging shock, which creates an oversupply of savings. Other forces that work in the same direction and can both create or exacerbate the problem include a drop in population growth, an increase in income inequality, and a fall in the relative price of investment. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession. It also highlights several implications for policy.
TL;DR: In this paper, the authors consider dynamic optimal income, education, and bequest taxes in a Barro-Becker dynastic setup and derive optimal linear formulas for each tax, as functions of estimable sucient statistics.
Abstract: This paper considers dynamic optimal income, education, and bequest taxes in a Barro-Becker dynastic setup. Parents can transfer resources to their children in two ways: First, through education investments, which have heterogeneous and stochastic returns for children, and, second, through nancial bequests, which yield a safe, uniform return. Each generation’s productivity and preferences are subject to idiosyncratic shocks. I derive optimal linear formulas for each tax, as functions of estimable sucient statistics, robust to underlying heterogeneities in preferences, and at any given level of all other taxes. It is in general not optimal to make education expenses fully tax deductible and the optimal education subsidy, income tax and bequest tax can co-move positively or negatively. I also show how to derive optimal formulas using \reform-specic elasticities" that can be targeted to empirical estimates from existing reforms. I extend the model to an overlapping generations dynastic model to study the eects of credit constraints on optimal education subsidies. Finally, I solve for the fully unrestricted policies and show that, if education is highly complementary to children’s ability, it is optimal to distort parents’ trade-o between education and bequests and to tax education investments relative to bequests. JEL classication : H21, H23, I21
TL;DR: In this article, the authors studied an economy inhabited by overlapping generations of households and investors, with the only difference between the two being that households derive utility from housing services, whereas investors do not.
Abstract: This paper studies an economy inhabited by overlapping generations of households and investors, with the only difference between the two being that households derive utility from housing services, whereas investors do not. Tight collateral constraint limits the borrowing capacity of households and drives the equilibrium interest rate level down to the housing price growth rate, which makes housing attractive as a store of value for investors. A housing bubble arises in an equilibrium in which investors hold houses for resale purposes only and without the expectation of receiving a dividend either in terms of utility or in terms of rent. Pension reform that reduces the contribution rate may increase the supply of credit and create the housing bubble. Empirical findings from China are consistent with theoretical predictions.
TL;DR: In this article, the idea of intergenerational equity as a natural behavioral law has been proposed to solve societal downfalls on a global scale in times of crises and to provide information on how to implement inter-generational justice.
Abstract: Globalization leveraged pressure on contemporary society. Today's most pressing social dilemmas regarding climate change, overindebtedness and aging Western world populations demand rethinking capitalism. Understanding the bounds of capitalism to avoid ethical downfalls beyond the control of singular nation states infringing on intergenerational equity – the fairness to provide an at least as favorable standard of living to future generations as enjoyed today – has become a blatant demand. In a history of turning to natural law as a human-imbued moral compass for solving societal downfalls on a global scale in times of crises; we may capture the human natural drive towards intergenerational fairness in order to retrieve information on how to implement intergenerational justice. Based on the idea of intergenerational equity as a natural behavioral law, the following paper theoretically outlines the current societal demand for eternal equity and proposes intergenerational justice implementation strategies. Intertemporal connectedness and interaction of overlapping generations enables intergenerational benefits transfers and burden sharing. Intergenerational mobility within intertemporal networks is enhanced through intertemporal opportunities as well as meritocracy alleviating intergenerational inequality. Overall, portraying intergenerational equity as a natural behavioral law strengthens the legal case for codifying intergenerational fairness on a global basis and contributes to interdisciplinary behavioral law and economic models on contemporary intertemporal predicaments. Exploring intergenerational constraints prepares to innovatively guide the implementation of eternal equity and intergenerational justice in overlapping generations’ intertemporal networks. Strengthening financial social responsibility, social welfare and environmental protection through future-oriented and socially responsible economic market approaches of capitalism in the 21st century is aimed at alleviating predictable economic, social and environmental crises to ensure a future sustainable mankind for this generation and the following.
TL;DR: In this paper, an overlapping generations model is proposed, where agents compete with their predecessors to acquire skills ranging from simple and transparent tasks to complex and opaque ones, and in equilibrium, complexity and rents rise over time.
Abstract: Agents choose to acquire skills ranging from simple and transparent tasks to complex and opaque ones. While potentially more productive, the latter generate more severe agency problems. In our overlapping generations model, agents compete with their predecessors. With dynamic contracts, long horizons help principals incentivize agents. Agents with short horizons are more difficult to incentivize than agents with long horizons. Hence, old agents are imperfect substitutes for young ones. This reduces competition between generations. As a result, young managers can opt for more opaque and complex technologies, and therefore larger rents, than their predecessors. Thus, in equilibrium, complexity and rents rise over time. Our theoretical results are in line with the increase in complexity and rents observed in the finance sector.
TL;DR: In this article, the authors assess empirically the second dividend in a dynamic, empirical and intertemporal setting that allows for measuring its impact on growth, its intergenerational redistributive effects, and its interaction with the demographic structure.
TL;DR: In this article, the authors analyzed how endogenous fertility and unemployment are affected by a social security system in an overlapping generations model and revealed that for any given minimum wage, the pension may improve fertility and decrease unemployment.
TL;DR: In this article, the authors examine a canonical stochastic overlapping generations model with dynamically complete markets and find that belief heterogeneity and life-cycle concerns are major forces contributing to the large gap between the volatility of stock returns and the risk-free rate found in U.S. data.
Abstract: This paper examines a canonical stochastic overlapping generations model with dynamically complete markets. Belief differences lead agents to place bets against each other and so wealth shifts across agents and across generations. Such changes in the wealth distribution strongly affect prices of long-lived assets since older generations have a lower propensity to save than younger generations. Contrary to the prices of long-lived assets, prices of short-lived assets are much less affected by the wealth distribution. Therefore, belief heterogeneity and life-cycle concerns are major forces contributing to the large gap between the volatility of stock returns and of the risk-free rate found in U.S. data.
TL;DR: In this paper, the authors compare pricing moments, and the informational content of prices, across economies with different investment horizons, and find that longer horizons reduce non-fundamental price volatility and incite more aggressive trading by the informed investors, which impounds their knowledge into prices.
TL;DR: In this article, the authors employ an Overlapping Generations model to assess ex ante the effects of such changes to the pension reform in Poland from 1999 as implemented in 2011 and in 2013.
Abstract: In many countries, the fiscal tension associated with the global financial crisis brings about the discussion about unprivatizing the social security system. This article employs an Overlapping Generations model to assess ex ante the effects of such changes to the pension reform in Poland from 1999 as implemented in 2011 and in 2013. We simulate the behaviour of the economy without the implemented/proposed changes and compare it to a status quo defined by the reform from 1999. We find that the changes implemented in 2011 and in 2013 are detrimental to welfare. The effects on capital and output are small and depend on the selected fiscal closure. Implied effective replacement rates are lower. These findings are robust to time inconsistency. The shortsightedness of the governments imposes welfare costs.
TL;DR: This paper studied the dynamics of housing prices in a pure exchange overlapping generations framework and characterized the equilibrium dynamics, which alternates between an expansive regime where leveraged borrowing increases housing prices, and a contractive regime where these variables decrease.
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TL;DR: In this article, the authors examined the potential of immigration to strengthen financial sustainability in Denmark and found that immigrants from richer countries have a positive fiscal impact, while immigrants from poorer countries had a large negative one.
Abstract: All over Europe, ageing populations threaten nations' financial sustainability. In this paper we examine the potential of immigration to strengthen financial sustainability. We look at a particularly challenging case, namely that of Denmark, which has extensive tax-financed welfare programmes that provide a high social safety net. The analysis is based on a forecast for the entire Danish economy made using a dynamic computable general equilibrium model with overlapping generations. Net contributions to the public purse are presented both as cross-sectional figures for a long time horizon and as average individual life-cycle contributions. The main conclusion is that immigrants from richer countries have a positive fiscal impact, while immigrants from poorer countries have a large negative one. The negative effect is caused by both a weak labour market performance and early retirement in combination with the universal Danish welfare schemes.
TL;DR: In this paper, an overlapping generations model of environmental externalities and capital accumulation where private contributions to environmental quality are motivated by a desire to socialize others into environmental attitudes is presented, which provides an economic rationale for the gap between the number of people who care about the environment and the number who adopt pro-environmental behaviours.
TL;DR: In this paper, the authors derive the equilibrium dynamics in closed form and show that joint presence of both risks leads to over-proportional risk exposure for households, which implies that the whole benefit from insurance through social security is greater than the sum of the benefits from insurance against each of the two risks.
Abstract: When markets are incomplete, social security can partially insure against idiosyncratic and aggregate risks. We incorporate both risks into an analytically tractable model with two overlapping generations. We derive the equilibrium dynamics in closed form and show that joint presence of both risks leads to over-proportional risk exposure for households. This implies that the whole benefit from insurance through social security is greater than the sum of the benefits from insurance against each of the two risks in isolation. We measure this through interaction effects which appear even though the two risks are orthogonal by construction. While the interactions unambiguously increase the welfare benefits from insurance, they can in- or decrease the welfare costs from crowding out of capital formation. The net effect depends on the relative strengths of the opposing forces.