Hostname: page-component-cd9895bd7-gbm5v Total loading time: 0 Render date: 2024-12-26T06:24:33.005Z Has data issue: false hasContentIssue false

ACTIVE INTERMEDIATION IN OVERLAPPING GENERATIONS ECONOMIES WITH PRODUCTION AND UNSECURED DEBT

Published online by Cambridge University Press:  01 June 1998

Mark Pingle
Affiliation:
University of Nevada
Leigh Tesfatsion
Affiliation:
Iowa State University

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.

Type
Research Article
Copyright
© 1998 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)