Simple Overlapping Generations Model Research Articles

Longevity, Fertility, and the Real Exchange Rate

AbstractWe build a simple overlapping generation model to investigate the effect of life expectancy on the real exchange rate where fertility is chosen endogenously. The model reveals that, although the overall effect of life expectancy on the real exchange rate is not certain, longer life expectancy tends to cause the real exchange rate to depreciate by reducing fertility. Fertility thus serves as a mediator in the effect of life expectancy on the real exchange rate. Evidence from 148 economies (1980–2018) shows a statistically significant and robust negative relationship between life expectancy and the real exchange rate. It is estimated that a 1 year increase in life expectancy is associated with a 1.5 percent depreciation in the real exchange rate. The evidence also confirms the mediated effect of fertility. The mediated effect that fertility exerts accounts for 30 percent to 50 percent of the total effect, depending on the real exchange rate index used.

Progressive sovereign wealth funds

Equity and efficiency can both be promoted, under some circumstances, by means of a sovereign wealth fund that mainly invests in the world stock market and whose gains are earmarked to a social dividend. A simple overlapping generation model with a fraction of hand-to-mouth agents is developed in which the government uses public debt to create such a fund. The socially optimal size of the fund is strictly positive and determined according to a formula that can be empirically implemented. While this policy is similar to popular capitalism in aiming at a more egalitarian distribution of capital income, it is predicated on a different notion of good society.

To seed, or not to seed? An endogenous labor supply approach in a simple overlapping generation economy

ABSTRACTWithin this paper, we develop a simple overlapping generations model with a renewable resource (forest) in the spirit of Koskela et al. (2002). Seeding activities (more broadly, forestry) are introduced in the form of a domestic production as well as a joy‐of‐giving bequest motive regarding the resource. In this simple framework, we show that altruism always guarantee a positive resource level at the steady state. However, studying the dynamics, we point out that the stability of the steady state crucially depends upon both altruism and forestry productivity: under low forestry productivity the steady state is always stable, while under high forestry productivity two period cycles (flip bifurcation) can emerge near the steady state if and only if altruism is sufficiently high which raises the question of resource preservation and leads to the conclusion that the road to hell is paved with good intentions.

Aging effects on consumption risk-sharing channels in European countries

This study tests the hypothesis that aging affects risk sharing via capital markets, federal governments, and credit markets. We apply the decomposition method to both simulated and European country data. For the simulation, we consider a simple overlapping-generations model and generate data that theoretically fit the model. Empirically, we apply the variance decomposition method using data from Europe. We find some evidence that aging has a significant effect on consumption risk-sharing via the credit market channel, whereas the results for other channels are mixed. With moderate reservations, our empirical results for Europe are consistent with the results derived from the simulated data.

Parental Health, Education Investment and Human Capital Accumulation

We extend the simple overlapping generations model with human capital formation to incorporate parental health condition determined by the health investment made by children. We model this health investment from children to parents as an upstream transfer motivated by exchanging for a higher level of human capital. We first show that the government should provide subsidies for individuals’ education and health investments. Second, the subsidy rates should be higher if the effectiveness of education investment or intergenerational transmission on human capital accumulation is higher

The economic consequences of mutual help in extended families

In the absence of well-developed markets for credit and insurance, extended families play a major role as a traditional system of mutual help. However these arrangements have important consequences on economic choices. In this paper, we use first hand data from Western Cameroon to explore this question. We find that the large majority of transfers follow a given pattern whereby elder siblings support their younger siblings in the early stages of their lives who in turn reciprocate by supporting their elder siblings when they have children. We interpret this pattern as a generalised system of reciprocal credit within the extended family. We propose a simple overlapping generation model to investigate its welfare properties. We then explore the implications of this pattern on labour market outcomes and find evidence of large disincentive effects. This pattern of transfers also implies that younger siblings are more educated but have fewer and less educated children.

A Human Capital Based Growth Model with Environment and Corruption

In this paper, we present a simple overlapping-generations model with human capital, pollution, and political corruption to consider problems related to sustainable growth. In many growth models that incorporate the environment, it is assumed that there exists an altruistic government that enforces the environmental policy to maximize the utility of households or social welfare. The conditions for sustainable growth are derived based on this assumption. However, the assumption that the government implements appropriate policies might be overly optimistic. Bribes, political donations, and corruption might taint and skew government policy. This paper also considers politico-economic problems. We assume that environmental policy is determined endogenously through a process of bargaining between the government and the firm (or interest group). Corruption relaxes environmental standards, lowers the long-run growth rate, and might cause economic stagnation. The long-run growth rate might become negative if the economy is rife with corruption.

Moral-hazard credit cycles with risk-averse agents

We consider a simple overlapping-generations model with risk-averse financial agents subject to moral hazard. Efficient contracts for such financial intermediaries involve back-loaded late-career rewards. Compared to the analogous model with risk-neutral agents, risk aversion tends to reduce the growth of agents' responsibilities over their careers. This moderation of career growth rates can reduce the amplitude of the widest credit cycles, but it also can cause small deviations from steady state to amplify over time in rational-expectations equilibria. We find equilibria in which fluctuations increase until the economy enters a boom/bust cycle where no financial agents are hired in booms.

A numerical analysis of Japan’s fiscal sustainability in a simple OLG model

We investigate the size of primary balance that can be sustained and the change in public debt and physical capital under transition dynamics in the Japanese economy. For our investigation, we construct a simple overlapping generations model. We find that a large primary surplus, 13.8–18.7% of GDP, is needed to prevent the public debt-to-GDP ratio from diverging infinitely. We also show that even if the large primary surplus can be maintained, the Japanese economy faces a sharp reduction in physical capital from 191 to 70.0% of GDP on the transition path.

集積，出生，および経済成長

In this paper, we construct a simple overlapping generations model with two regions and interregional migration to examine problems related to dynamic agglomeration economies. The existence of agglomeration economies is well established （Krugman 1991, Fujita et al. 1999）. Assuming Marshallian externalities, productivity in one region increases with population in that area. Therefore, an income difference between a core and a peripheral area diverges when people move from the periphery to the core area. We assume that households receive utility from the number of children and from consumption. Generally speaking, urbanization increases the costs of having children. Agglomeration has two diverse effects on household utility. On the one hand, it increases productivity, wage income, and consumption, which are positive effects of agglomeration. On the other hand, urbanization negatively affects the number of children and labor supply （because people use more time to raise children in cities）. If these negative effects exceed the positive ones, then people do not agglomerate in the city. Two symmetric cities exist in equilibrium. If positive effects predominate, then people concentrate in metropolitan areas. Our main conclusions are as follows. First, the types of equilibrium become the determinants of important variables in the steady state. Capital stock, population, number of cities, and GDP is higher in cases of symmetric equilibrium. Second, the types of equilibrium do not affect the level of the capital-labor ratio and per capita GDP in the steady state. Third, along the transitional dynamics, the level of households’ utility is higher in the symmetric equilibrium.JEL Classification:O18, O40, R11, J13

Can urban pollution shrink rural districts?

This paper discusses how the externality of environmental damage affects the equilibrium properties of a simple overlapping generations model with multiple regions. Simulation results indicate that the environmental policy of the government decreases capital accumulation. When the government imposes an environmental tax on the urban sector, the urban-to-rural population ratio decreases, whereas the total fertility rate increases.

Population growth in polluting industrialization

Recently, many contributions have focused on the relationship between capital level, growth and population dynamics, introducing fertility choice in macro-dynamic models. In this paper, we go one step further highlighting also the link with pollution. We develop a simple overlapping generations model with paternalistic altruism according to wealth and environmental concerns. One can therefore explain a simultaneous increase in capital intensity, population growth and pollution, namely a polluting industrialization. We show in addition that a permanent productivity shock, possibly associated to technological innovations, promotes such a polluting development process, escaping a trap where the economy is relegated to low levels of capital intensity, population growth and pollution.

What Is the Natural Weight of the Current Old?

We consider a simple overlapping generations model with an externality a la Arrow-Romer [1,2] and a government with fiscal powers. If it wishes to maximize a criterion depending on the lifelong utility of agents, is there a natural weight for the utility of the current old? We show in a simple example that this weight depends on the specific features of the model, in particular the length of the horizon, and cannot be chosen arbitrarily. Our result has a neat economic interpretation [2].

Life Expectancy, Labor Supply, and Long-Run Growth: Reconciling Theory and Evidence

We set up a simple overlapping generation model that allows us to distin- guish between life expectancy and active life expectancy. We show that individuals optimally adjust to a longer active life by educating more and, if the labor supply elasticity is high enough, by supplying less labor. When calibrated to US data the model explains the historical evolution of increasing education and declining labor supply (of cohorts born 1850-1950) as an optimal response to increasing active life expectancy. We integrate the theory into a unified growth model and reestablish increasing life expectancy as an engine of long-run economic development.

Timing of childbirth, capital accumulation, and economic welfare

This paper examines the effect of the timing of childbirth on capital accumulation and welfare in a simple overlapping generations model, where each agent lives for four periods and works for two periods. We show that delayed childbearing not only reduces population, but also generates fluctuations in the age composition of workers in the labor force. This causes the aggregate saving rate to fluctuate, which leads to cycles in the capital-labor ratio. When all agents delay childbearing, we analytically show that both the capital-labor ratio and the welfare of all agents can fall in the long run, despite the population decline. When a fraction of agents delay childbearing, it has differential welfare effects on agents depending on their positions in the demographic cycles. The effects of lower lifetime fertility and technological progress are also examined.

On Governance and the Demographic Transition

It is now conventional wisdom that institutions shape household fertility choices, especially in developing countries. However, deeper insights into the mechanisms at play are still needed. This paper develops a game-theoretical framework with a simple overlapping-generations model to show how a typical household may come to prefer bearing and raising numerous children as a savings scheme for retirement and not rely on conventional outlets for saving when facing weak institutions. On the one hand weak institutions increase the risk that individuals may lose their savings if relying on conventional outlets. On the other hand, childbearing as an investment/savings scheme carries with it the risk that disguised or complete unemployment may prevent grown children from providing the expected old-age financial support. The typical household thus trades off between both types of risks, yet with more control in the latter case, as the likelihood of unemployment can be reduced by carefully selecting a child quality-quantity strategy. Mild conditions are sufficient to show that sound institutions induce less fertility and foster private saving and oldage consumption. A simple voting experiment unveils a tricky socio- economic dynamics whereby wealthier households may have stakes supporting weak institutions.

THE COMPOSITION OF GOVERNMENT EXPENDITURE: ECONOMIC CONDITIONS AND PREFERENCES

This paper examines the question of why the composition of government expenditure differs among democratic countries and to what extent it may be explained by differences in economic conditions or preferences. A simple overlapping generations model, which allows for a range of relevant factors, is constructed to examine the division of expenditure on public goods and a transfer payment under majority voting. The model yields a closed-form solution for the majority choice of the expenditure ratio. An empirical examination suggests that income inequalities play a minor role while different preferences for public goods reflecting cultural differences across countries may play an important role in accounting for the substantial variations in expenditure patterns. (JEL D72, H41, H53, H11)

Durability and Economic Dynamics

This paper investigates how product’s durability affects the dynamic properties of the economy, using a simple overlapping generations model with durable goods. One of the chief characteristics of the durable-goods market is that a sale condition at a certain period affects another period’s condition. It is shown that this interaction causes oscillatory equilibria that diverge from the stationary point. Hicks [1] argued that unstable oscillations in the economy lead to endogenous business cycles. This paper’s result provides one reason of how unstable oscillations occur from firm’s optimizing behavior.

Child policy solutions for the unemployment problem

Using a simple overlapping generations model with endogenous fertility, minimum wages and involuntary unemployment, it is shown that the child tax can be used as an instrument to promote population growth and restore full employment.

A theory of moral persistence: Crypto-morality and political legitimacy

Why, how, and under what conditions do moral beliefs persist despite institutional pressure for change? Why do the powerful often fail to promote the morality of their authority? This paper addresses these questions by presenting the role of crypto-morality in moral persistence. Crypto-morality is the secret adherence to one morality while practicing another in public. A simple overlapping generations model is developed to examine the conditions under which crypto-morality is practiced, decays and influences the direction of moral change. We demonstrate the empirical relevance of crypto-morality by discussing the moral foundations of political legitimacy in various historical episodes.