Two-sector Overlapping Generations Model Research Articles

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.

POSTPONING RETIREMENT AND SOCIAL SECURITY IN A TWO-SECTOR MODEL

Pay-as-you-go social security schemes in the Organisation for Economic Co-operation and Development countries are facing solvency problems, as people are living longer and birth rates have declined. Postponing the full retirement age (FRA), when retirees are entitled to full pension, has been proposed as a solution. This effectively lowers the payroll tax rate since pension is paid only in the post-FRA period. In a two-period two-sector overlapping generations model, I show that this shift lowers savings (because a part of the expected old-age income is consumed in the first period), as employment increases. In the transition to the new steady state, capital is decumulated and the wage rate falls. Contrast this with a reduction of the payroll tax rate where the initial old suffer reduced consumption, but the young have higher post-tax income and this spurs capital accumulation.

Mr. Hayek and the Classics: A Suggested Interpretation of the Business Cycle Theory in Prices and Production

This paper endeavors to develop a modern theoretical underpinning of Friedrich August von Hayek’s business-cycle theory as published during the Great Depression in his book Prices and Production. According to Hayek, economic cycles are caused by monetary shocks, which distort the relative-price schedule across economic sectors. Possible consequences of these price distortions, which are also called “Cantillon effects,” include malinvestment and an unsustainable production structure, which sooner or later has to be corrected by a recession. It turns out that this type of economic fluctuation can be condensed into a simple two-sector overlapping generations model.

Population Aging, Relative Prices and Capital Flows Across the Globe

This paper develops a multi-country two-sector overlapping-generations model to study the impact of demographic change on the relative price of nontradables and current account balances. An aging population expands the relative demand for nontradables, exerting upward pressure on their relative price (structural transformation), and entails a willingness to save more, as households discount higher survival probabilities, and invest less, as firms face increasing labor scarcity. The general equilibrium reduction of the real interest rate (secular stagnation) dampens the increase in the relative price as savings become less profitable, thus lowering consumption at older ages. The model robustly predicts that faster-aging countries will face greater increases in the relative price of nontradables and unprecedented accumulations of net foreign asset positions (global imbalances) over the twenty-first century.

Postponing Retirement and Social Security in a Two Sector Model

Pay-as-you-go (PAYG) social security schemes in the OECD countries are facing solvency problems, as people are living longer and birth rates have declined. Postponing the full retirement age (FRA), when retirees are entitled to full pension, has been proposed as a solution. This effectively lowers the payroll tax rate since pension is paid only in the post-FRA period. In a two-period two-sector overlapping generations model, I show that this shift lowers savings (because a part of the expected old age income is consumed in the first period), as employment increases. In the transition to the new steady state, capital is decumulated and the wage rate falls. Contrast this with a reduction of the payroll tax rate where the initial old suffer reduced consumption, but the young have higher post-tax income and this spurs capital accumulation.

Winners and Losers of Universal Health Insurance: A Macroeconomic Analysis

Abstract This paper studies the supply-side distortions and the consequences resulted from provider-side cost containing universal health insurance (UHI) scheme. A two-sector overlapping generations model of endogenous physicians’ specialty choice is presented. We find that the general public is possible to be benefited from the cost containing UHI if the quality of medical services does not deteriorate too much. However, physicians in the medical service sector suffer from such scheme and end up earning lower incomes, regardless of one’s specialty and talent. Inequality among physicians also increases.

Demographics and the Real Exchange Rate

We develop a two-country, two-sector overlapping generations model to examine the effect of population aging on the real exchange rate (RER). While an older population raises the relative demand for nontradables (a feature of structural transformation) putting upward pressure on relative prices thus appreciating the RER, it also implies a lower real interest rate (distinctive of secular stagnation) that dampens the elderly nontradables consumption and thus mitigates the RER appreciation. We quantify a general equilibrium effect of 0.1% RER appreciation following a rise by 1% in the relative old dependency ratio in line with our empirical estimates.

The labor force age structure and employment structure of the modern sector

This paper studies the relationship between population aging and structural change in terms of employment distribution in the non-agricultural sector. Based on cross-country panel data, it is revealed that a greater share of elderly workers in the labor force is associated with more service employment relative to that in the industrial sector. To rationalize this finding, a two-sector overlapping generations model is constructed. The model highlights two forces, namely the “scale effect (SE)” and the “composition effect (CE)”, that drive the correlation between the labor force age structure and the service-industry employment ratio. Calibrating main model parameters with China's micro level data, simulation results well fit the country's historical trajectory of structural change. According to population forecast data, the model predicts a substantial growth of services relative to the industrial sector in China up to 2050.

GLOBALIZATION AND THE INDUSTRIAL REVOLUTION

This paper argues that trade specialization played an indispensable role in supporting the Industrial Revolution. We calibrate a two-good and two-sector overlapping generations model for England's historical development and investigate how much different England's development path would have been if it had not globalized in 1840. The open-economy model is able to match the data closely, but the closed-economy model cannot explain the fall in the value of land relative to wages observed in the nineteenth century. Without globalization, the transition period in the British economy would have been considerably longer than that observed in the data and key variables, such as the share of labor force in agriculture, would have converged to figures very distant from the actual ones.

Population aging and China's social security reforms

China's population aging problem is more severe than other countries because of the one-child policy adopted in the early 1980s, and the current social security system is not sustainable. A two-sector overlapping generations model is developed to analyze China's social security reforms. It is shown that if the government does nothing to reform the system, maintaining the current replacement and contribution rates, social security debt will be explosive. Various reforms are considered, including adjusting the replacement rate while keeping the contribution rate constant, increasing the contribution rate while maintaining the current replacement rate, increasing the retirement age with the contribution rate being unchanged, increasing the retirement age with the replacement rate being unchanged, and switching to a fully-funded system by using government assets to pay the implicit social security debt. The effects of these reforms on capital accumulation, the output, and the welfare for each generation are simulated and compared.

THE POLITICAL ECONOMY OF ENVIRONMENTAL POLICY WITH OVERLAPPING GENERATIONS

A two-sector overlapping generations model illuminates the intergenerational effects of a tax that protects an environmental stock. A traded asset capitalizes the economic returns to future tax-induced environmental improvements, benefiting the current asset owners, the old generation. Absent a transfer, the tax harms the young generation by decreasing their real wage. Future generations benefit from the tax-induced improvement in environmental stock. The principal intergenerational conflict arising from the tax is between generations alive at the time society imposes the policy, not between generations alive at different times. A Pareto-improving tax can be implemented under various political economy settings.

A Two-sector Overlapping Generations Model with Endogenous Discounting

In this paper, we consider a two-sector two-periods overlapping generations model with inelastic labor, consumption in both periods of life, endogenous discounting and homothetic preferences. We prove that under the assumption of under-accumulation of capital, an economy with endogenous discounting depending on income is much more likely to experience macroeconomic fluctuations compared to an economy with constant discounting.

Debt Policy in a Competitive Two-Sector Overlapping Generations Model

We analyse debt policy in a two-period, two-sector overlapping generations model with Leontief technologies. We find that debt, issued to transfer resources to the initially old, could be welfare improving in the new steady state for an economy which satisfies the usual conditions for dynamic efficiency viz. the rate of interest is at least as great as the population growth rate. Out of steady state, the only potential losers are the recipients of the transfer. This could happen if the interest rate were to fall sufficiently to offset the effect of the transfer. From generation one onwards everyone becomes better off (under reasonable asumptions). Contrast this with a one-sector model where the definite gainers are those who are alive on date one.

On efficiency and local uniqueness in two-sector OLG economies

We consider a two-sector overlapping generations model with homothetic preferences. Under standard conditions on technologies, upon large enough values for the share of first period consumption over the wage income, we prove that the dynamic efficiency and local uniqueness of the competitive equilibrium hold. On the contrary, for lower values of the share of first period consumption over the wage income which imply dynamic inefficiency of the steady state, local indeterminacy arises when the elasticity of intertemporal substitution in consumption is large enough.

Existence and uniqueness of steady-state equilibrium in a two-sector overlapping generations model

In his seminal paper Galor [A two-sector overlapping generations-model: a global characterization of the dynamical system, Econometrica 60 (1992) 1351–1386] establishes conditions for the existence of equilibrium in the two-sector overlapping generations (OLG) model. Although appealing theoretically, these conditions are implicit and not easy to apply. This paper develops new theorems on the existence and uniqueness of steady-state equilibrium in the two-sector OLG model. We provide explicit conditions on the utility and production functions for the existence and uniqueness of equilibrium, with which one only needs to check the derivatives of the production and utility functions and their interactions, without requiring solving for the savings function and its derivatives. We present detailed steps to check the existence and uniqueness of equilibrium and provide illustrative examples.

Industrial Policy, Lobbying, and the Direction of Technological Change

Adopting a two-sector overlapping generations model, this paper studies the influence of asymmetric technology absorption and producers' lobbying on the path of technological change. The underlying assumption of the paper is that, in its formulation of industrial policy, the government is open to the influence of producers' lobbying activities. Simulation results are threefold. First, biased institutions (i.e., lobbying rules) under the distorted government (i.e., the one open to lobbying) might, indeed, help drag the economy towards the right direction. In this process, current generations would experience welfare loss, while a technologically advantageous environment is prepared for future generations. Secondly, the undistorted government (i.e., the benevolent government) supports the path of capital-augmenting technological change, which is also the case when the distorted government introduces new lobbying rules leading to cost reductions in the investment goods producing sector. Thirdly, sectoral asymmetries in technology assimilation cannot correct the bias in the political market, and hence cannot be considered a critical factor determining the direction of technological change.

Dynamic efficiency in the two-sector overlapping generations model

This paper examines dynamic efficiency in the context of a two-sector overlapping generations model. First, conditions for dynamic efficiency in a centrally planned economy are derived. Then, in a competitive environment, the implications of dynamic (in)efficiency for the steady state relative price and steady state welfare are demonstrated. For the special case of a log-linear world, the golden rule savings rate is identified along with restrictions on parameters that yield dynamically efficient steady states. The results are further demonstrated via a welfare analysis of a simple tax/subsidy scheme.

The two sector overlapping generations model: A simple formulation

In this paper we provide a simple formulation of a two-sector overlapping generations model based on the social production function which characterizes the factor-price frontier associated with interior temporary equilibria. We first give a simple restriction for the existence of a long run equilibrium. Under gross substitutability, we show that such a steady state is locally indeterminate if the consumption good is sufficiently capital intensive, the elasticity of savings with respect to wage is low enough and the elasticity of savings with respect to the interest rate is large enough. We also exhibit a flip bifurcation giving rise to period-two cycles. When gross substitutability is violated, we prove that local indeterminacy may also occur when the investment good is capital intensive. However, when the consumption good is capital intensive, it requires the existence of at least two distinct steady state. Indeed, saddle-point stability is obtained as soon as uniqueness of the steady state holds. We also give conditions for the existence of complex characteristic roots and we exhibit a Hopf bifurcation giving rise to quasi-periodic cycles.

Endogenous Cycles in a Two-Sector Overlapping Generations Model under Intertemporal Substitutability

Endogenous cycles cannot emerge in one-sector monetary overlapping generations models when there is intertemporal substitutability, even if returns to scale are increa- sing. In this article, we show that the conclusions are different when there are two sectors. Considering a two-sector monetary overlapping generations economy, we assume that in each sector, households consume the two goods produced in the economy and firms produce one final good under an internal constant returns to scale technology. However, returns to scale are increa- sing at the social level because there are sector specific externalities. In this framework, we show that endogenous cycles can occur when households prefer to consume the good produced in the other sector. This result is essentially due to the fact that aggregate consumption in each sector highly depends on the price of the good produced in the other sector. Moreover, we can notice that it does not depend on the substitutability or complementarity between the two goods. Cycles endogenes dans un modele a generations imbri- quees a deux secteurs avec substituabilite intertemporelle RESUME. - Des cycles endogenes ne peuvent pas emerger dans des modeles a genera- tions imbriquees monetaires a un secteur lorsqu'il y a substituabilite intertemporelle, meme si les rendements sont croissants. Dans cet article, nous montrons que les conclusions sont differentes lorsqu'il y a deux secteurs. En considerant un modele a generations imbriquees monetaire a deux secteurs, nous supposons que dans chaque secteur, les menages consomment les deux biens produits dans l'economie et des firmes produisent un bien final avec une technologie a rende- ments internes constants. Cependant, les rendements d'echelle sont croissants au niveau agre- ge parce qu'il y a des externalites specifiques a chaque secteur. Dans ce contexte, nous mon- trons que des cycles endogenes peuvent apparaitre lorsque les consommateurs preferent consommer le bien produit dans l'autre secteur. Ce resultat est essentiellement du au fait que le consommation agregee dans chaque secteur depend fortement du prix du bien produit dans l'autre secteur. De plus, nous remarquons que cela ne depend pas de la substituabilite ou de la complementarite entre les deux biens.

A two-sector overlapping generations model with heterogeneous capital

Summary. This paper characterizes the existence and stability properties of steady state solutions as well as the nature of transition paths of a two-sector growth model with heterogeneous capital. It compares the properties of a Cobb-Douglas–Leontief economy with heterogeneous capital with the properties of the same economy with homogeneous capital. The model with heterogeneous capital reveals a set of characteristics different to those of the model with homogeneous capital. These include the saddle-path stability of the non-trivial steady state as well as the possibility of overshooting and in contrast to the homogeneous capital case, the possibility of damped oscillations along the transition path for realistic parameter values.