A positional game for an overlapping generation economy

Abstract

We develop a model with intra-generational consumption externalities, based on the overlapping generation model by Diamond (1965). More specifically, we consider a two-period lived overlapping generation economy, assuming that the utility of each consumer depends also on the average consumption level by the consumers in the same generation. We suppose that such level is not taken as a parameter by agents, who behave strategically. We characterize the consumption and saving choices for the two periods in the Nash equilibrium path and we determine a dynamic equation for capital accumulation. For the associated dynamical system, we find a unique positive steady state for capital and we investigate how its position, as well as that of the steady states for consumption in both periods, change with respect to variations in the degree of interaction in the two periods. We finally compare the steady states for capital with and without social interaction.