Intergenerational Models

Abstract

Recently it has been widely recognized by economists that the extension of the Arrow–Debreu model to a dynamic multi-period economy should not be restricted to models with a finite number of economic agents, each facing an infinite horizon. In analysing many economic problems, it seems natural to consider an open-ended horizon economy with individuals (or households) living for a finite number of periods; thus, at each date the economy consists of consumers of different ages (who interact with each other) and hence are inherently characterized by different economic parameters (such as their current income or planning horizon). In his seminal work, Samuelson (1958–9) attempts to explain, in an overlapping generations (OLG) equilibrium model, Irving Fisher’s (1961) theory of interest. This simple model of a market economy characterized by an unbounded horizon, short-lived, overlapping, but essentially identical households, is different from the Arrow–Debreu model in various aspects. We shall concentrate upon similar models which have been successfully used to analyse microeconomic and macroeconomic problems. We shall focus upon the applications of these intergenerational models in: (1) efficient intergenerational and intertemporal allocation of resources, (2) intergenerational transfers (such as social security), and (3) optimal financing of government debt.