Overlapping Generations Model Research Articles

PENSIONS, INCOME TAXES, AND HOMEOWNERSHIP: A CROSS‐COUNTRY ANALYSIS

AbstractThe article studies the role of pensions and income taxes in determining homeownership. We develop a stochastic, overlapping generations model with tenure choice and heterogenous skill types calibrated to Germany. Then, we simulate alternative income tax and pension policy structures from the United States and Australia, since these developed nations have similar incomes per capita, but highly different homeownership rates. Our results highlight that the pension system and its financing have decisive long‐term effects on homeownership. The latter is even more significant than income tax, where labor and capital income taxation affect homeownership in opposite directions.

Child Labor, Corruption, and Development

Abstract Employing an overlapping generations model with endogenous education choice and corruption, we investigate how child labor and corruption influence human capital accumulation and development. We show that multiple steady states exist in the economy. One steady state has a high level of human capital, while the other has a low level of human capital. In the steady state with a low level of human capital, child labor and corruption exist, fertility and child mortality rates are high, and the welfare level is low. Conversely, in the steady state with a high level of human capital, child labor and corruption are diminished, fertility and child mortality rates are low, and welfare is high. In addition, we show that it is difficult to steer an economy away from a poverty trap with child labor and corruption because bureaucrats of the current generation are opposed to policy changes, such as the reinforcement of monitoring and penal regulations. However, we highlight the possibility for the government to develop the economy in the poverty trap by implementing an education policy, which is Pareto improving.

Public investment, factor income taxation, and intergenerational welfare distribution in an overlapping generations model

Public investment, factor income taxation, and intergenerational welfare distribution in an overlapping generations model

Social security, bequests, and social comparisons

AbstractWe examine the long‐run impact of unfunded social security on capital stock and wealth inequality in an overlapping generations (OLG) model where newborn individuals differ in their inheritance. In our model, individuals' decisions are subject to social comparisons, which can lead to overspending on personal consumption and result in zero bequests left within poor families. In this scenario, unfunded social security increases long‐run wealth inequality by redistributing wealth from poor to rich families, who always leave bequests. However, it increases long‐run capital stock, too. We also show that when none or all of the families leave bequests in the long run, our model predicts negative and neutral effects of social security on capital accumulation, in line with the standard OLG models of Diamond and Barro. Thus, our results emphasize the need to account for heterogeneity in bequest behavior in the analysis of social security.

When you need it or when I die? Timing of monetary transfers from parents to children

The standard overlapping generations model assumes the ability to borrow against bequests. If this assumption is not met, it may happen that not all generations smooth their consumption over time. We prove that by allowing for inter vivos transfers in this latter situation, all generations smooth consumption, i.e. the first best solution is restored. Next, using a combination of Dutch survey and administrative data, we provide empirical support for the model's implication that parents transfer wealth when their children need to borrow out of future resources. Our findings suggest an instrumental role for inter vivos transfers as a device that generations can resort to for smoothing their consumption over time.

Financing universal health care: Premiums or payroll taxes?

This paper presents a stochastic overlapping generations model with endogenous health investment to study the transition from the existing hybrid health insurance system in Germany towards a uniform system, financed by either funded or unfunded premiums or payroll taxes.Our simulation results highlight the insurance properties of payroll taxes, but also their cost in terms of labor supply distortions and moral hazard. We find that compulsory deductibles decrease aggregate welfare in Germany, although they reduce moral hazard and increase private health investment. Reform models with premiums also induce precautionary behavior and increase labor supply, but at the same time increase exposure to productivity risk. Since the introduction of a funded system is costly for transitional cohorts, unfunded premiums provide the highest efficiency gains in our framework.

Non-linear means-tested pensions: Welfare and distributional analyses

We present a novel approach to public pension systems by introducing a new class of non-linear means tests, encompassing conventional linear pension systems. Our framework accommodates both progressive and regressive testing methodologies. We develop an overlapping generation model designed for a small open economy with heterogeneous agents, determining the socially optimal pension function. Through calibration of our model to the Australian context, we find that the optimal non-linear income test exhibits strong regressivity, coupled with a diminished average withdrawal rate as workers’ income increases. This work sheds light on optimizing pension structures to better align with the distributional and macroeconomic structure of the economy.

On equilibrium determinacy in overlapping generations models with money

This paper provides a detailed analysis of the local determinacy of monetary and non-monetary steady states in Tirole (1985)’s classical two-period overlapping generations model with capital and production. We show that the sufficient condition for local determinacy in endowment economies provided by Scheinkman (1980) does not generalize to models with production: there are robust examples with arbitrary utility functions in which the non-monetary steady state is locally determinate or indeterminate. In contrast, the monetary steady state is locally determinate under fairly weak conditions.

Fair Pension Policies with Occupation-Specific Ageing

Abstract We study the optimal design of a fair public pension system in a multi-period overlapping generations model with occupation-specific morbidity and mortality that depends on the retirement age. The fairness constraint acts as institutional device ensuring that lifetime returns to contributions are equal across occupational groups. We consider group-specific replacement rates and a calculatory interest rate for early contributions as policy instruments. Calibrating the model to Germany, we find that the transition to optimal fair pension policies may induce early retirement of blue-collar workers and significantly raises their lifetime pension benefits and welfare. Aggregate welfare increases in all fair pension scenarios.

Public education and the environment

This paper investigated, in an overlapping generations model highlighting two-period lived households, the influence of education and environmental awareness on physical capital and environmental terms by sketching, at the stable steady-state equilibrium, the comparative static examination. According to this approach, the study has shown that public education policy can neither boost environmental quality standards nor the capital stock. The study also found that larger environmental awareness as young results in upper capital accumulation and upper environmental quality. Regarding individuals' environmental awareness in old age, it was revealed that it leads on the one hand to less physical capital accumulation and on the other hand to a better environmental quality, only in the case where the value of environmental awareness at a young age is 10 and the value of environmental awareness at old age is greater than or equal to 40. Keywords: Capital accumulation; environmental awareness; environmental quality; public education

WITHDRAWN: Addressing China’s retirement Dilemma: Exploring strategies to balance life expectancy and leisure preference

We construct an overlapping generation model (OLG) that reflects workers’ endogenous retirement intention and retirement age, and examine the effects of increased life expectancy and leisure preference on individuals’ retirement age choice, with a specific focus on China’s unique demographic and economic context. The deepening degree of population aging in China may lead to a series of economic and social challenges if not properly addressed. Our findings suggest that as life expectancy rises, individuals may choose to work longer and retire later to accumulate more resources for their extended retirement years. However, with fewer young people entering the workforce and an increasing older population, labor shortages and pressures on the pension and healthcare systems are of paramount concern. The results have significant implications for policy-making in China, emphasizing the need for strategic adjustments to retirement age policies and leisure preferences to sustain economic growth and manage the aging population crisis.

Macroeconomic analysis of the child benefit: Fertility, demographic structure, and welfare

This paper examines the macroeconomic and welfare effects of the child benefit, using a general equilibrium overlapping generations model incorporating fertility choices. The model is calibrated to Japan and produces the benefit elasticity of fertility in line with the empirical estimates. Expanding the per-child payment leads to welfare gains for future generations in the long-run equilibrium. Notably, the long-run gains extend to individuals who are childless throughout their lives and do not receive child benefits. Higher fertility rates facilitated by the expansion and the resulting demographic change account for the results via several channels. However, reaching the new equilibrium takes approximately 100 years as the demographic change necessitates sufficient transition periods. The accrual of welfare gains is thus gradual and takes a long time.

Effect of ageing on housing prices: A perspective from an overlapping generation model

This paper suggests that ageing has divergent effects on housing prices, and the divergence sources from both aspects of ageing and housing. For the ageing, a fall in fertility and a rise in survival rate could have opposite effects on housing prices. For the housing, the prices of the two components – land and structure – respond to fertility rate decline and survival rate increase to different extent. Therefore, the effect of ageing on housing prices does not have a definite pattern in the long run. In the short run, the results suggest that ageing can produce a turning point in the price dynamics. To the left of the peak, ageing boosts prices while to the right, it has the opposite effect, therefore the impacts of ageing on housing prices are different with time.

Financial intermediation and efficient risk sharing in two-period lived OLG models

This article investigates a two-period lived overlapping-generations (OLG) model that incorporates financial intermediation. A risk-neutral bank offers loan and deposit contracts that insure risk-averse agents against idiosyncratic income shocks. Agents prefer financial intermediation to capital markets if it provides efficient risk sharing. The analysis demonstrates that in any two-period lived OLG model in which productive capital is increasing in investment levels, financial intermediation, when implemented for the purpose of efficient risk sharing, cannot instigate business cycles or complex dynamics. The resulting dynamics is monotonic and qualitatively indistinguishable from the dynamics of the classical OLG model by Diamond (Am Econ Rev 55(5):1126–1150, 1965). Business cycles may only occur if banks offer inefficient contracts. Efficient contracts will, in general, not induce dynamically efficient growth paths.

Rural roads and consumption: empirical evidence from China

ABSTRACT Inconvenient transportation limits the expansion of the rural consumer market, further widening the consumption gap between urban and rural areas in China. To examine the impact of rural road construction on rural consumption, we derive two-sector overlapping generations model and use city-level panel data for rural China from 2010 to 2019 by empirical analysis. The findings show that the construction of rural roads has not only achieved an increase in the level of consumption expenditure of rural residents, but also promoted the transformation and upgrading of the consumption structure in rural areas.

Dynamical analysis of healthcare policy effects in an integrated economic-epidemiological model

We study the static and dynamical properties of a model that describes the interaction between the economic and epidemiological domains. The epidemiological sphere is represented by a susceptible–infected–susceptible model, while the economic domain consists of an overlapping generations model in which the workers correspond to the non-infected population of adults. The productivity of the firms and the propensity to save for retirement of the households are negatively affected by the disease spread. A capital tax is levied and the collected resources are used to curb the spread of the outbreak. We show that multiple endemic steady states can arise from the interaction between the two domains, and different stable endemic attractors can coexist with the stable disease free steady state. We study analytically and numerically the complex dynamics and the evolution of the basins of attraction in the case of multistability. We show that the effect of taxation can be beneficial from both the epidemiological and the economic points of view, as it can give rise to new steady states characterized by reduced shares of infected people and increased capital level, it can simplify the dynamical behaviors and reduce the size of the basins of attraction of those outcomes in which large shares of infected people and low capital levels are observed.

Markov equilibrium of social security: An analytic solution under CRRA utility and the future of social security

The politico-economic sustainability of pay-as-you-go social security has been studied with the help of two-period overlapping generation models under Markovian equilibrium concepts. The literature has mostly used logarithmic utility for tractability, whereas versions under the more general isoelastic CRRA utility have only been analyzed computationally. This paper demonstrates that a prototypical social security model under CRRA utility has a closed-form solution; it revisits previously obtained computational conclusions and presents new findings and extensions. Quantitatively, the model can explain the observed path of payroll tax rates in the USA and predicts increased tax rates as the equilibrium response to lower future population growth rates. The model predicts a gradual increase in tax rates, from the current 12.4% to about 15% or so in 2060, and then staying at that level. Benefits are expected to decrease slowly, by about 2% (or less) per decade, starting in 2030.

Controlling Chaotic Fluctuations through Monetary Policy

Abstract This paper applies the chaos control method (the OGY method) proposed by Ott, E., C. Grebogi, and J. A. Yorke. (1990. “Controlling Chaos.” Physical Review Letters 64: 1196–9) to policy-making in macroeconomics. This paper demonstrates that the monetary equilibrium paths in a discrete-time, two-dimensional overlapping generations model exhibit chaotic fluctuations depending on the money supply rate and the elasticity of substitution between capital and labor under the assumption of the constant elasticity of substitution (CES) production function. We also show that the chaotic fluctuations can be stabilized by controlling the money supply rate by using the OGY method and that even when the OGY method does not work due to periodic attractors, adding moderate stochastic shocks to the model can successfully stabilize the economy.

James Tobin on Overlapping Generations Models and the Microeconomic Foundations of Macroeconomics Reconsidered

The American Keynesian economist and Nobel laureate James Tobin entitled his contribution to the inaugural issue of Journal of Money, Credit and Banking “A General Equilibrium Approach to Monetary Theory” (1969) yet he was sharply critical of the version of general equilibrium analysis used in the now-prevalent dynamic stochastic general equilibrium (DSGE) approach to macroeconomic modeling. He also rejected claims that overlapping generation (OLG) models provided a choice-theoretic foundation for the holding of fiat money, denying that the assumption that people held fiat money because no other asset existed was less arbitrary than allowing costs of transactions between assets to be non-zero. Yet, while not accepting OLG as the explanation of why people hold fiat money, Tobin, in a series of articles from 1967 to 1983 (some joint with Walter Dolde), placed the life-cycle model of consumption and saving (whose origins he attributed to an earlier Yale economist, Irving Fisher) into an OLG setting. This article examines Tobin’s critiques of DSGE and OLG modelling in macroeconomics, what he meant by “a general equilibrium approach to monetary theory,” and his contribution placing the life-cycle model in an OLG setting.

Firm-Specific Capital, Output-Demand Beliefs, and Involuntary Unemployment in a Stock Market Overlapping Generations Model: A Theoretical Investigation

Firm-Specific Capital, Output-Demand Beliefs, and Involuntary Unemployment in a Stock Market Overlapping Generations Model: A Theoretical Investigation