Overlapping Generations Model Research Articles

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.

Dynamics of Optimal Growth and Overlapping Generations Models in Economic Convergence and Inequality: A Review

This study explains the dynamics in the Optimal Growth [OGR] and Overlapping Generations [OGE]models and their implications for (real) GDP per capita [RGDPPC] in different countries, short-run and long-run. This analysis uses RGDPPCs for ten countries consisting of five per each developed and developing category for 116 years. Sri Lanka is used as the favourite destination and calculated the RGDPPC ratios. Data on RGDPPC for ten countries explains that the relative differences between RGDPPC ratios and the baseline are varying over time. Also, it demonstrates a high variation in the short-run dynamics between countries. Both models predict a convergence of economies into a steady-state having the same amount of RGDPPCs in the long run. This prediction appears to be acceptable in the analysis. Having Sri Lanka as the benchmark, Japan exhibits low RGDPPC values at the initial stage and eventually gets closer to the RGDPPCs of developed countries. This is not a direct convergence to the steady-state but convergence to the RGDPPC level of developed countries. Also, the concept of efficient contributions by generations in the OGE model was considered and it reflects a more realistic reasoning as per the short-run dynamics, but that resulted in making differences across countries per capita GDP in the long run. The long-run dynamics revealed that growing inequality is a common issue in developing nations as a very low percentage of populations enjoys a high proportion of national output.

Demographic change and natural interest rate of China

We study the impact of demographic change on the natural interest rate of China. We analyze the effect of aging population by constructing an overlapping generations model, which embeds demographics, technology and public debt to facilitate simulating China’s natural interest rate and its counterfactuals. We find that China’s natural interest rate has been declining slowly ever since 2000 and the main driver of this downward trend is the declining mortality rate. In the next two decades, due to increasing young labor, China’s natural interest rate will have a flat period of about ten years in the downward trend.

Asset bubble and growth: Elastic labor supply with fiscal policy

This paper examines the interaction between asset bubbles and endogenous growth. Using an overlapping generations model with elastic labor supply and fiscal policy, we demonstrate that the inefficiency of the equilibrium without bubble, in conjunction with specific fiscal policy criteria, guarantees the existence of a bubble. This inefficiency is due to the sub-optimality of labor supply. Furthermore, we establish a positive impact of asset bubbles on economic growth. These bubbles prompt an increase in the interest rate, encouraging households to increase their labor supply. This surge in labor supply, in turn, heightens the marginal productivity of capital stock, culminating in an increase in the growth rate. Additionally, we find that, provided certain fiscal parameters are met, asset bubbles are welfare-enhancing.

Life expectancy, fertility, and retirement in an endogenous-growth model with human capital accumulation

This paper analyzes how the improvement in life expectancy affects fertility, educational investments, retirement, and economic growth based on an overlapping-generations model with human capital accumulation. We show that if the labor productivity of the old is greater (lower) than a critical value, then higher life expectancy will raise (reduce) fertility. Moreover, agents will postpone retirement as life expectancy increases if the labor productivity of the old is near the critical value. However, life expectancy changes do not affect output per capita's growth rate. A decrease in the income tax rate does not affect fertility, but causes agents to postpone retirement while simultaneously raising the growth rate of output per capita. The empirical analysis finds that life expectancy has an overall negative effect on fertility, and this negative effect diminishes as life expectancy (a proxy for labor productivity of the old) rises. Moreover, life expectancy does not significantly influence growth for countries with high life expectancy or middle or high income.

Should Italy switch to a flat tax? An assessment based on a heterogeneous agents OLG model

We use a heterogeneous agents overlapping generations (OLG) model to quantitatively assess the impact of a reform in which a personal income tax with increasing marginal tax rates is replaced by a flat tax possibly complemented with a deduction. The value of the flat tax rate is set in order to balance the government budget and accordingly it increases with the value of the deduction. The model is calibrated and simulated for Italy. For low values of the deduction, aggregate labor supply increases, though this aggregate effect masks a completely different impact on the intensive and the extensive margin of labor supply: in particular, the activity rate is reduced by the introduction of a flat tax. As to inequality, it rises and this increase can be mitigated by using an higher value of the tax deduction, which however dampens down the positive effect of a flat tax on economic performance. Finally, the effect of a flat tax on social welfare crucially depends on the degree of inequality aversion embedded in the social welfare function and on the Frisch elasticity of labor supply.

The fiscal and intergenerational burdens of brakes and subsidies for energy prices

We study the effects of different financing rules for untargeted energy price brakes and subsidies on intergenerational welfare in a large-scale overlapping generations model. The results indicate that, in comparison with a laissez-faire solution without any government interventions, debt-financed implementations of such measures are very detrimental for young and future generations. However, the taxation of windfall profits can significantly contribute to reduce the economic burdens of these generations; whereas, the positive effects on older generations are much less pronounced.

Tax policy and aggregate stability in an overlapping generations model

AbstractIn the context of a two‐period non‐monetary overlapping generations model with Cobb–Douglas preference and technological specifications, this paper explores the theoretical as well as quantitative interrelations between equilibrium (in)determinacy versus (i) a progressive tax schedule on wage income and (ii) a balanced‐budget rule with endogenous labour taxation. In sharp contrast to previous studies on a one‐sector representative‐agent macroeconomy, we find that both fiscal formulations can possibly operate as stabilizing instruments against cyclical fluctuations driven by agents' self‐fulfilling beliefs. The key policy implication of our no‐indeterminacy result is that depending on what is the underlying analytical environment, countercyclical income taxation may stabilize or destabilize the business cycle.

Estimating the effects of demographics on interest rates: A robust Bayesian perspective

We highlight a reason for the vast range of estimates for the effect of demographics on interest rates: the magnitudes are not well-identified without often omitted data on capital and life-cycle consumption. Using nonparametric prior sensitivity analysis for an overlapping generations model estimated through Bayesian methods, we show small changes in the prior for the discount rate, intertemporal elasticity of substitution, and depreciation rate can shift posterior quantiles for the effects of demographics by up to 1.5 percentage points. Capital-output ratio data substantially tighten estimates of the depreciation rate but not the discount rate. Life-cycle consumption is especially informative about the intertemporal elasticity of substitution.

Banking competition and capital dependence of the production sector: Growth and welfare implications

This article explores how competition among banks affects economic growth and welfare in an overlapping-generations model with rational expectations. We show that monopolistic banking can outperform its competitive counterpart in terms of both growth and welfare if the production sector is capital-intensive. In contrast, competition is beneficial if production is labor-intensive. The capital dependence of the production sector determines the relative importance of agents’ saving incentives and banks’ intermediation margins for capital accumulation. The theory of the second best explains the welfare-enhancing effect of a monopoly since capital accumulation is generally inefficient. We link these findings to empirical evidence.

A new approach - deriving expected future income for intertemporal models

Individuals' current consumption decisions are influenced by the prospect of future income. This paper discusses a method for inferring agents' future (expected) income based on expectations of future states of the environment. Psychology, risk, the probability of future events occurring, etc. play an important role in this area. These essential parts have been incorporated into a simplified model that will make it easier for us to determine the value of future income and serve to more accurately incorporate agents' positive or negative expectations into intertemporal two-period or overlapping-generation models. This paper brings a new approach to this issue based on prospect theory and reference point theory. The issue is addressed only at the microeconomic level, while this approach can easily be aggregated into macroeconomic models.