Overlapping Generations Model Research Articles

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WITHDRAWN: Addressing China’s retirement Dilemma: Exploring strategies to balance life expectancy and leisure preference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

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.

The impact of education costs on income inequality

Reducing education costs is a crucial policy element with broad support in the U.S. However, is lowering the cost of learning a panacea for eliminating income inequality? In this paper, I theoretically examine the relationship between income inequality and the cost of education by building a three-stage overlapping generation model with two sectors and two education systems. In contrast to conventional studies treating education as a unified concept or in hierarchical order, I consider two types of education, each targeting the training of workers for different roles in production. Workers who decide to spend time learning and improving creativity skills can work to produce intermediate goods used in current production and illuminate future production technology. Coders who produce industrial robots are one example of workers who receive this type of education. The other type of education only improves workers’ efficiency and helps them become experts in positions. For instance, office clerks who receive computer training can become more productive in dealing with their daily tasks. I pick a reasonable set of parameters, and the simulation result implies that reducing the cost of practical training may end up enlarging income inequality. The key is whether the effect resulting from the wage gap between jobs (wageeffect) dominates the effect of changing the share of workers in jobs (compositioneffect). Reducing the cost of learning creativity encourages marginal experts to learn creativity and marginal basic workers to receive training, leading to declining wage gaps and income inequality.

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

Corporations’ Investment, Market Value, and Involuntary Unemployment in a Stock Market Overlapping Generations Model: A Purely Theoretical Exercise

Corporations’ Investment, Market Value, and Involuntary Unemployment in a Stock Market Overlapping Generations Model: A Purely Theoretical Exercise

A new approach of overlapping generation model via fixed point technique

<abstract><p>This article explored a specific variant of the overlapping generation model using a nonlinear Fredholm integral equation. We considered assumptions related to the Ćirić operator, offering a new perspective compared to existing research. To solve the equation, we employed the Galerkin method, which approximates it as a finite system of equations. By combining these approaches, we conducted a comprehensive analysis of the model, providing insights into its dynamics and potential applications.</p></abstract>

Stamping out stamp duty: Housing mismatch and welfare

Property transaction taxes—also known as stamp duty—are widely viewed as an inefficient form of taxation. In this paper, we examine the welfare implications of removing stamp duty in a general equilibrium overlapping generation model with heterogeneous agents. Our model features an idiosyncratic shock to housing preferences, which may create mismatch or induce households to move. We calibrate the model to the Australian housing market, and conduct counterfactual policy experiments where stamp duty is replaced with recurrent property or consumption taxes. We find that removing stamp duty raises household mobility and reduces the degree of housing mismatch substantially. When examining steady states, we find that newborn households prefer entering an economy with a recurring property tax rather than one with stamp duty. In contrast, when examining the transition we find that existing households prefer replacing stamp duty with a consumption tax.

Dynamic Inefficiency, Environmental Tax and Climate Change – A DICE Overlapping Generation Model Analysis

Dynamic Inefficiency, Environmental Tax and Climate Change – A DICE Overlapping Generation Model Analysis

Working from Home, Endogenous Fertility, and Human Capital Accumulation

This paper analyzes the effects of working from home on fertility rate and human capital accumulation using an overlapping-generations model, which is mainly based on Groezen, Leers and Mejidam (2003) and Cardak (2004). Although Groezen, Leers and Mejidam (2003) consider childcare cost and child allowances in a model of a small open economy, they ignore educational expenditures and do not analyze human capital accumulation. Although Cardak (2004) considers human capital accumulation and assumes it is determined by governmental or parental expenditures on education and by parent’s human capital endowments, he ignores childcare cost and child allowances, and assumes population size is constant in each period. This study considers human capital accumulation in a model introduced childcare time with endogenous fertility by following Murata (2022). We then consider the effects of working from home on fertility rate and human capital accumulation. This paper is motivated by enforced working from home during the coronavirus (Covid-19) pandemic. We find that if the government increases childcare subsidies, working from home promotes human capital accumulation and economic growth.

Childcare Support Policies, Endogenous Fertility, Human Capital Accumulation, and Dynamics of National Debt

This paper analyzes the interaction among childcare support policies, endogenous fertility, and human capital accumulation using an overlapping-generations model, which is mainly based on Groezen, Leers and Mejidam (2003) and Cardak (2004). Although Groezen, Leers and Mejidam (2003) consider endogenous fertility and child allowances financed by tax or foreign debt in a model of a small open economy, they ignore educational expenditures and do not analyze human capital accumulation and national debt. Although Cardak (2004) considers human capital accumulation and assumes it is determined by governmental or parental expenditures on education and by parent’s human capital endowments, he ignores child allowances and assumes population size is constant in each period. This study considers human capital accumulation in a model introduced childcare time with endogenous fertility and assumes that child allowances and childcare services are financed by income tax and national debt. We then consider two childcare support policies―raise child allowances or expand childcare services―and compare the effects of both policies on endogenous fertility and human capital accumulation. Moreover, we analyze dynamics of national debt.

Redistributive policy and R&D-based growth

This study examines how redistributive policy that attempts to reduce inequality by taxing the bequests of the rich and redistributing the revenue to the poor affects economic growth in an overlapping generations model of R&D-based growth with both product development and process innovation. We show that such a policy simultaneously increases growth and reduces inequality in the long-run. When the market structure adjusts, partially reducing inequality in the short-run, the effect of redistributive policy on economic growth depends on the values of the social return to variety parameter. However, when the market structure adjusts fully in the longrun, the redistributive policy decreases the entry of new firms but raises economic growth and reduces inequality.

The environment, life expectancy, and growth in overlapping generations models: A survey

AbstractIt is widely accepted that environmental and demographic changes will significantly influence the future of our society. In recent years, an increasing number of studies has analyzed the interlinkages among economic growth, environmental factors, and a specific demographic variable, namely life expectancy, applying an overlapping generations framework. The aim of this survey is threefold. First, we review the role of life expectancy and pollution for sustainable growth. Second, we discuss the role of intervening factors like health investment and technological progress as well as institutional settings including government expenditures, tax structures, and inequality. Finally, we summarize policy implications obtained in different models and compare them to each other.

Role of Human Capital Accumulation in the Adoption of Sustainable Technology: An Overlapping Generations Model with Natural Resource Degradation

We develop an economic model to derive the conditions under which individuals will invest in human capital and move on to adopt sustainable technology instead of natural resource-intensive technology. For this purpose, we extend the overlapping generation model developed by Ikefuji & Horii as our analytical framework. Unlike Ikefuji & Horii who developed an overlapping generation model (OLG) in the context of local pollution, the authors adopted it in the context of renewable natural resources. To do this, we have introduced the production sector that relies on natural resource-intensive technology. This research extends beyond the Ikefuji & Horii model by assuming that an individual derives utility by investing in his child’s education apart from utility derived from consumption when young and adult. Human capital accumulation enables individuals to participate in human capital-intensive production, which produces output through sustainable production technology. As the main result of our theoretical analysis, we find that more educated individual is less dependent on the natural resource endowment for earning their income. We also find that sustainable consumption growth requires that individuals assign a certain positive weight to investment in their child’s education. A long-run steady-state equilibrium level of human capital accumulation is higher and higher than the weight assigned by the parents to the child’s education. In this overlapping generation’s economy, sustainable consumption growth requires that individuals assign a certain weight or give some importance to human capital accumulation. This follows from the fact that the long-run steady-state value of the income earned by an individual depends positively on the expenditure on education.