Life-cycle decisions and general equilibrium in the heterogeneous-agent OLG economy

Abstract

ABSTRACT This study develops a life-cycle model to predict an overlapping generations economy with heterogeneous agents. In our proposed model, ex-ante heterogeneity includes the work probability, survival rate, subjective discount rate, and intertemporal elasticity of substitution. We observe differences in financial decisions and asset accumulation among heterogeneous agents and calculate equilibrium values of aggregate economic variables, such as consumption and capital. For the numerical analyses, we classify the population into four groups based on labour productivity and gender, and investigate the life-cycle behaviours of heterogeneous agents. Retirees in the male group with low labour productivity and low remaining life expectancy have the highest propensity to consume and the highest consumption elasticity for retirement shock compared to other retirees. Workers with relatively high labour productivity have lower risk adjustment factors, indicating that they are less concerned about retirement risk than less productive workers.