Overlapping Generations The First Jubilee

American Economic Association
Overlapping Generations: The First Jubilee

Author(s): Philippe Weil
Source: The Journal of Economic Perspectives, Vol. 22, No. 4 (Fall, 2008), pp. 115-134
Published by: American Economic Association
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22, Number 4?Fall
Journal ofEconomie Perspectives?Volume
115-134
2008?Pages
Overlapping Generations:
The First Jubilee
Philippe Weil
Samuelson's
Paul
so
has
Seldom
(1958)
a model
simple
so
been
model
generations
overlapping
influential.
Its "wow"
feeling of surprise at its originality and coolness

The
years.
are
generations
of
spite
its
always
still
age,
ripe
the uncontroversial
from
Starting
new
in
paper,
elicits
coming
along"
turned 50.
and
factor,
the
have not paled with the
wonder.
observation
that
"we
in a world
live
unattributed
(all
has
where
to
refer
quotations
that violates the credo of the first

Samuelson,
1958), Samuelson built a model
fundamental welfare theorem with which we still inculcate undergraduates
50 years
later.
to Samuelson,
According
economies:
with
distortions
and
failures,
absent
competitive
the
in a framework
occurs
model
that
the
usual
not
is
theorem
usually
Mona
Like
Lisa's
popularity?along
I take
half-century.
of
exposition
tainty,
an
model
are,
with the many

it as my
of
of
economic
the
the welfare
why
to
in this
brief
results
the main
the
smile,
enigmatic
explanation
and
inwhich
proved.
generations
overlapping
Pareto
plausible
realistic than the world of agents living synchronous and finite existences
the
as
such
be
in an overlapping
more
ways,
of market
suspects
theorem
is, in many
best
need
equilibrium
of all, this failure of the firstwelfare
efficient. Worst
generations
even
in
well
necessarily
generations,
overlapping
market
is not
all
welfare
mysterious
extent,
significant
issues it has
celebratory
overlapping
properties
paper
the
the
its
in the last
after
provide,
model
generations
of
for
responsible
illuminated
to
of
properties
a short
under
cer
generations
overlapping
Philippe Weil isProfessor ofEconomics, Universit? Libre de Bruxelles (European Centrefor

Advanced Research inEconomics and Statistics), and at SciencesPo (Observatoirefran?ais des
conjonctures
?conomiques),
Paris,
France.
He
is also
Research
Fellow
of
the Centre
for
Economic Policy Research, London, United Kingdom, and Faculty Research Fellow, National
Bureau
of
Economic
Research,
Cambridge,
Massachusetts.
Journal ofEconomie Perspectives
116
model
so much
differ
in a deliberately
from
the
canonical
mode,
nonencyclopedic
of Samuelson's
Arrow-Debreu
a few
striking
to review,
and
and
applications
extensions
model.
straightforward
deceptively
framework
This paper is not the first attempt at an intellectual history of the overlapping
Solow (2006) sketches the main features of the model
in a
generations model.
volume
that
and
Samuelson
made
contributions
gathers
Economic
Modern
by
and
colleagues
at Samuelson's
friends
in 2005. Interestingly, Solow confesses that he forgot to

in his earlier 1983 book on Paul
generations model
90th birthday celebration

include the overlapping
Theory.
a wrhile
it took
Indeed,
for
Samuelson's
framework to impose itself on the profession. The Kareken and Wallace

(1980)
volume and Sargent (1987) textbook played a considerable role in itsdiffusion, and
(1987) and Farmer (1999, chap. 6) provide superb overviews of its
Geanakoplos
main
contributions.
The Model
In
this
time
as
be
My
wrong.)"
Solow
in an
goal,
features
of
version
from
of
to
notes,
a
produce
era when
the
the
"test
positive
rationale
generations
overlapping
own
Samuelson's
(2006)
to
needed
Samuelson's
rendering.
B?hm-Bawerk's
rate
for
of
that
idea
interest.
such
(It
objectives
thought, is instead to highlight what
to the history of economic

essential
streamlined
markedly
was,
would
preference
to be
present
differs
times
motivation
original
out
section,
that at
model
turned
belongs
I take to be the
the model.1
Birth and Death
Demography:
the world
Imagine
is
of a
comprised
succession
never-ending
of
generations.
The perpetual renewal of cohorts (or, under uncertainty, themere possibility that new
is a crucial element of the overlapping
cohorts might appear),
generations
model?I
arrival
The
tions model:
calls
return
will
this
biological
of
to
and
pop
up
accordingly
is only
interpretation
I discuss
is exogenous
cohorts
"birth"
when
point
generations
additional
process
this
an
welfare
issues.
in Samuelson's
spontaneously
refers
expositional
to
the
genera
overlapping
in the
economy.
"newborn."
convenience.
The
Tradition
However,
newborn
this
could
little green people deposited on our planet by storks or aliens, or

our shores. More
immigrants just disembarked on
radically, souls of all beings may
as well be
have
been
planted
in the economy,
spies,
since
time
immemorial
and
his early training in France tomention

here thatAllais
(1947)
in a 135-page
model
early version of the overlapping
generations
to his book. To explain wrhy it attracted little attention, Malinvaud
that it is
(1987) opines
appendix
of many cases and to introduction of long formulas." But ?
"rather complex,
leading to consideration
tout seigneur, tout honneur: credit must be given where it is due.
It behooves
developed
an economist
like dormant
what
amounts
who
received
to an
PhilippeWeil
be
could
out
gradually
coming
common
denominator
strated early on by Shell,

The
of
the
as
cold
active
economic
demon
(as
agents
117
1971).
of
these
is that
interpretations
matters
what
is
economic birth:deep down, a "new" agent is not defined by age, nor biological or
ethnic characteristics, but by the fact that it is not included in the economic
calculus
left
of
their
by
individuals.
to
parents
this vantage
for
fend
disowned
point,
or
themselves,
unloved
to whom
children
loved
contrast,
By
From
agents.
pre-existing
are
immigrants,
ascendants
generous
are
who
children
"new"
have
be
immigrants in a society in which they are cherished and

queathed wealth,
are
to old bloodlines,
to
not. They are best thought of as belonging
helped,
pre-existing
families
or
societies.
selves
are
severed
current
bind,
or
constitute
"new"
economic
disconnection
with
In combination
infinite
in
model
no
the
the
as
is ever
agent
of an
previous
model
generations
succession
unending
with
together
model.
workhorse
of
and
is about
generations,
of dated
in
contrast,
the
of
is
goods,
Ramsey-Cass
macroeconomic
dynamic
is part
rate
the arrival
the number
By
of
individual
every
in which
model
incarnations
cohorts.
theory),
pre-existing
One
family.
as a limiting case of the

overlapping
should therefore think of the Ramsey model

generations
constraints
borrowing
are comprised of "new" agents implies that the total
other
born:
their
overlapping
future
generations
the
when
radically,
from
the
assumption
agents,
overlapping
serves
(which
new
and
economic
of distinct
number
short,
current
that generations
the hypothesis
more
economically
In
individuals.2
of
Even
of
new
economically
has
agents
shrunk
to zero. I will return to this insight below.

Death
(alternatively: kidnapping by storks or aliens, or emigration) is certain.
It could be assumed to occur randomly, as when Blanchard
(1985) adopts Yaari's
(1965) simplifying assumption of age-independent death probabilities, or even with
zero probability, as in my model of overlapping

infinitely-lived families (Weil,
as
none
matters
the
of
the overlapping generations
this
of
1989);
specificity
really
model
on
than
economist
different,
exact
the
length
of
the
lives.
of
arrival
How
to understand
wants
who
of
on
qualitatively,
depends,
and
why
when
the
disconnected
new,
agents
consumers
overlapping
vanish
rather
is, for
the
is
model
generations
interest.
secondary
(1958) splits lives into three periods, but he also examines briefly
a version with two periods dubbed youth and old age. Most of the literature,
following the lead of Cass and Yaari (1966), has adopted the two-period normaliza
it has the technical advantage of wiping out intertemporal trade
tion because
Samuelson
between
ascendants
encounter
two
consecutive
only
rules
once:
out
cohorts.
when
intergenerational
When
am
there
young
exchange
(and
are
two
they
because
ages
are
of
old).
executing
I meet
life,
This
an
my
once-only
intertempo
2
Townsend
can be
(1990) pointed out that the overlapping
(1980) and Woodford
generations model
consumers
reinterpreted as a world of staggered binding borrowing constraints hitting infinitely-lived
the random dates at
In Aiyagari and McGrattan
(1998), the average time between
every other period.
of the endogenous
which the level of assets hits zero serves as a measure
average economic
lifespan.
118
ral
trade
the
two-period
the number
models
to assume
to the one
Samuelson
and
economy
that
that
"chocolate"
on
exchange
it is
arbitrary
equilibria.
more
purposes:
number
of
by
or
periods,
in
receive,
and
are
date
given
that there is only one

nonstorable.
on
presumably
with
spot
at a
born
agents
identical.
stemming from the date of birth.
nonproduced
agents
the
all
assume
(1958),
others
lest
Samuelson
a hot
it melts.
Call
must
and
day,
and
el
in the
good
calls
this
the
good
or
eat
either
e2
in the first and second periods
received by agents
endowments
an
compute
for most
is immaterial
with
to
it easy
entailed
rather than discretely, yield similar insights although
limits heterogeneity
Following
itmakes
specified
trade
intergenerational
to handle.
harder
Technology
of
because
it is convenient
Finally,
This
absence
periods
generations
overlapping
are much
they
of
time flows continuously
which
The
is convenient
version
Fortunately,
realistic
twice.
meeting
requires
chocolate
of their life.
Preferences
To
to consider
enough
care
sumers
in which
infinitely
of
weights
the utility
impatience,
the
across
consumption
overlapping
("infinitely
reason
I do
why
who
only
versus
of youngconcavity
old-age
the
of
current
I abstract
to
with
the
the
these
details
relative
degree
of
to smooth
the desire
capturing
of
will
consumption
capturing
from
extreme
the
in between,
consumption
utility
However,
periods.
about
function
and
consumers"),
("almost infinitely impa
the way
somewhere
con
in which
patient
all
go
care
course
is of
Reality
not
it is
model,
generations
economies
preferences:
consumption
consumers
below.
and
polar
of
they mostly enjoy eating when young
impatient
clear
become
the
versions
old-age
The
consumers").
of
properties
two
about
only
economies
tient
the main
reveal
here.
Autarkic Equilibrium
The
foregoing
us
enable
tion)
there
so
are
that
assumed
exchange
right
that
away
and must feel happy about
equilibrium3
There
streamline
(which
assumptions
to conclude
are
two
four
periods
reasons
of
mtergenerational
away
either:
they (because
there
life, agents
should
belonging
exchange
within-cohort
say,
to lend
they are just like me),
be
any
trade
to different
as
impossible
heterogeneity,
I wish,
original
must
be
formula
in
self-sufficient
it.
cannot
is
Samuelson's
consumers
there
to members
and none
in
discussed
can
be
of my
Because
equilibrium.
cohorts
meet
only
no
mira
generational
generation,
of them would
once,
Because
above.
so would
borrow from me.
The recursive competitive

when
it is born solves its own
(in which each generation
equilibrium
interest rate) coincides under certainty with
problem given the then-prevailing
two-period maximization
theWalrasian
(in which the souls of all agents, born or unborn, meet at the
competitive equilibrium
are quoted a sequence of
their
beginning of time and
intertemporal prices under which they determine
a result, I will not distinguish between
the two concepts.
optimal behavior). As
Overlapping Generations: The FirstJubilee
Because
the
is not
good
consumption
no
storable,
consumer
wants
to
119
choc
keep
olate in a pocket from young to old age (itwill melt away). Finally, if the economy
or the planet is closed to foreign trade (which I assume), there is no possibility for
interest
The
for
with
goods
exchanging
chocolate
might
reflects
(as
technology
summarized
are
consumers
whether
ensures
and
that
of
chocolate
clear.
the
or
that
desire
level
equilibrium
endowments
it is at this point
patient
the
Its
trades
today
eliminates
that markets
the value
by
infinitely
at which
mechanism
of the individuals)?and
the preferences
terms
the
is the market
to trade
have
extraterrestrials.
determines
which
rate,
tomorrow,
consumers
or
foreigners
el and
e2 and
that it starts to matter
impatient.
Iwill now show that the equilibrium interest rate is either very low or very high
to whether the
(below or above the rate of growth of population)
according
is
economy
the
case,
with
peopled
very
is not
equilibrium
competitive
or
patient
very
Pare
consumers.
impatient
In
to-optimal.
the
In
latter,
the
former
it is. The
very
fact that itmight not be iswhat elicits wonder: how can it be that the firstwelfare
theorem fails to hold when the interest rate is low?
Low
rate
interest
tions
models.
Samuelsonian
"Samuelsonian"
rate
young
receive
who
agents,
and
tastes,
but
don't
of a
requirements
and
from
-100
punitive
future
To
they
will
in both
endowments
try
to
the
exchange
some
extra
of
periods
the mismatch
mitigate
against
enjoy
what
and herein
equilibrium.
time
ex units
valuable
of
percent:
In
of
equilibrium?the
faced
our
this
the
with
infinitely
endowment
this
setting,
transfers from young
it is trivial
to old
terms
consumer
consumes
old
eY of
lies the symptom of the Pareto

In
net
equilibrium
extreme
patient
each
equilibrium,
chocolate
such
remember,
they get
when
old.
trade
e2 as
young?
this is one of the

current
between
to deviate
wish
required
It
rate must
interest
not
does
The
to execute
simply
in
autarky.
goes
to waste,
sub-optimality of the competitive
to construct
that improves
the
of
of
pattern
chocolate
goods
care
life, only
the
between
is that there is no one with whom
above,
competitive
chocolates,
autarky.4
But
as
spend more
exchange.
genera
"classical,"
latter.
For agents to be happy with this situation?and
called
I will
standard. Unsurprisingly,
difficulty,which we discussed
be
are
economies
Gale
by
fascinating features of overlapping
interest
the
consumption.
old-age
endowments
this
dubbed
Economies
our
Suppose
when
are
than
former
been
have
the most
high
properties
the
discussing
about
contrast,
By
their welfare
economies
they exhibit
(1973) because
sequence
of
intergenerational
the lot of every generation:
simply
rate of
the equilibrium
interest rate equals
the marginal
evaluated at the endowment
consumption
point, so that
second-period
+ v(c2). In the
I am discussing, the marginal
(eY) /v' (e2) if the utility function is u(cx)
example
is always nil?that
Hence
1 + r = 0, and r = ?100
is, u'{
) =0.
utility of first-period consumption
From microeconomic
substitution
1 + r= u
between
first principles,
first- and
percent.
120
in
confiscate,
endowment
consume,
this
old,
source
rate
These
storage
off
set aside
rate
as
infinitely
could
it
for
equals
to old
more
Since
age.
to
possible
a
by
social
planner
t<
<
infinity,an amount r,with 0
get
for
something
do
young
store
the
exceeds
alternative
r is below
rate
interest
that
the
yields
a
to
been
no
tax when
resources
optimum
rate
of
would
rather
much
the
happen
to
storage
concomitant
that
Then,
r<n,
interest
transfer
out
that
gains
some
date
transfer
central
rate
until
old.
when
when
planner
of
population
as
long
younger
the
of
the
n
growth
provides
sequence
proposed
superior
rate
interest
transfers
from
itwill be more beneficial

than
generation
storage
in this
the
by
to
of
rate
the
and
old.
it would
to
have
is a welfare
young
from
private
reaches
capital
the
rate
interest
n, when
the whole
consider
generally,
situation
to old
and
rate
the
what
return to storage is decreasing,
competitive
young
as
long
is below
More
the marginal
from
as
setting,
technology
starting
the
the
economy.
is attained
in which
crowding
the
the
n. As
return
private
is transferred
young
in a world
constant.
than
product?until
the
the
n,
out
Crowding
is fixed by the linear production

endowment
As
Left to their own devices,
if the
of
the next
from
optimorum
use
will
aside.
goods
from
redistribution
rate
implicit
in a Samuelsonian
idea
improving
The
chocolate.
under
the young
with
but
improving. For each generation,

old
above,
chocolate
of
starting
young,
r. However,
rate
growth
when
transfer
store
larger
store
chocolate
storing
r, intergenerational
population
young to old is Pareto

receive
at
proliferate
r)el in the competitive equilibrium.
transferring,
surrender
chocolates
Chocolates
goods described
el units
put
one
that
equilibrium
and
0,
is better,
young, but they get them back with a vengeance.

can
each
1, from young to old. The old in the initial time
nothing:
generations
Subsequent
from
gains
the
is instead
r, so
The
r<
when
possibility:
and
(1 +
there
return
transformation).
consumption
is e2 +
of
instance,
Suppose
tomorrow.
of
new
extent
its fullest
growth
statements
the
every
net
exogenous
partially
one
have
consump
growth
of
the
consumption.
seem.
rate
melt
In
r chocolates
marginal
consumers
the
achieved
1 +
-1,
n +
they may
with
exogenous
and
than
a
population
most
then
is growing
guarantees
case
old-age
chocolates
into
here,
growth
old
numerous
exogenous
the
of young
If population
to the equilibrium with nonstorabie

old
until
of
than
(the
r ?
when
above,
compare
period
equal
in which
values
only
general
technology
be
number
times more
I consider
rate
result, their old-age consumption

Now
young
added,
the
mutates
impatient
storage
to
since
today
then
be
easily
technology
their mattress
the
1 +
from
e{,
to the old. The
an
thus
from
growth
apply
otherwise. Compared
our
are
the young
transfer
are more
results
self-destruct,
can
is better
generation
interest
that
economic
n would
about
chocolate
population
perpetual
of
at
linear
and
r <
<
transfer it lump-sum
(1 + n)T to each older person. Although
endowments
of
sequence
only
made
n, so
rate
tion of e2+
is the
t, with
e2 instead of e,2in the competitive allocation.
constant
the
and
a constant
assuming
amount
lump-sum
of the young
old, e2+ t >

at
perpetuity,
the
of
should
be
ensuing
growth
where
of
rise
there
is so
increased?with
in its
marginal
population.
This
is
121
PhilippeWeil
Samuelson's
rate of interest" or Phelps's
"biological
"golden rule" of capital
(1961)
accumulation.
two
Notice
growth
the
rate
interest
of
because
the
ris
less
run
must
transfers
Pareto-improving
direction,
opposite
the
fails when
theorem
n. First,
Pareto-improving
intergenerational
I discuss below why, and not simply how, the
I will return when
transfers to which
first welfare
of
characteristics
essential
than
from
fundamental
rate
the
of
population
to old,
young
of
asymmetry
not
and
time:
in
is an
there
initial instant (the big bang, or today), but no last period. As a result, any transfer
from old to young, be it implemented in a low or in a high interest rate economy,
hurts the first generation of old that it affects. If Eve had been taxed when old to
of
from
If transfers
This
complain.
from
transfers
old
when
to old.
young
ceased
can
she would
Abel,
Second,
be
Thus,
generalized
eliminating
one
the
pattern
perpetual.
generation?the
gradual
of
regardless
be
when
anything
to
off
must
a while,
receive
worse
been
transfers
after
not
does
also
have
young-to-old
cold-turkey
but
young
argument
old?would
out
phasing
transfers
from
of
to
young
a Pareto-deterioration.^
involves
always
rate.
to old
young
is taxed
that
and
Cain
interest
the
of
the value
one
to young
transfers
provide
Economies
Classical
or
rate
interest
High
"classical"
are
economies
generations
overlapping
less
as I will show below,

interesting from the welfare point of view (even though,
of
usefulness
the
overlapping
that
Suppose
little
and
very
very
valuable,
about
care
their
the
are
wipe
the
This
growth
The
is enough
of
population
resulting
endowment
endowment
the more
to ensure
for
competitive
situation
to borrow.
inclination
consumers'
consumption,
old-age
rate.
out
in this
want
they
that
very
the
low
the
in
their
r<
the
n case).
utility
is
their
this
age
is not
second-period
as
autarkic,
(again,
The
to borrow
value
of
be
young
is a
discussed
requirement
interest rate must be very high
equilibrium
allocation
most
must
allocation
happy
to
consumption
old-age
against
then the equilibrium
for competitive equilibrium),

to
consumption
Since
to borrow
equilibrium
to be
about
consumption.
like
limited
features.
mainly
old-age
would
However,
If consumers
above.
consumers
the young
endowment.
generations
I will just sketch theirmain
Accordingly,
is not
model
of
peculiar:
less
that
and
the
interest
rate
agents
higher
the
is above
second-period
the
care
young
the
about
interest
rate
of
consumption.b
consume
their
in the first period ex,which they value, while the old consume their
e2,which they value very little.One might tempted to argue that it is
case: if the marginal

rate of return on
statements could be wrong in one semi-pathological
These
are old when the system is eliminated would
storage increased sharply with the amount stored. Those who
of its curtailment. The resulting
still be poorer, but they would have stored more goods in anticipation
fall
the detrimental
if it is large enough,
beneficial
increase in the return on storage could overcome,
in lifetime wealth. See Weil
(2002) for details.
6
interest rate goes
If the marginal
goes to zero, the equilibrium
consumption
utility of second-period
to infinity, since the equilibrium
interest rate 1 + r = u' (e^/v' (e2) tends to positive
infinity when
?/( ) is small and goes to zero.
722
after
Pareto-suboptimal:
most of the chocolates

them
to
lump-sum
to
symmetrical
answer
is
the
the
it be
who
young
low
like
rate
interest
while
negative:
wouldn't
all,
if a
better
social
confiscated
planner
of the old, since they enjoy them so little, and redistributed

so much?
them
of
economy
who
generations
take
the
Isn't
part
exactly
subsection?
previous
in both
case
this
of
phases
The
the
old-to
young redistribution would obviously be better off (they are giving up chocolates
for which they have little appetite when old against chocolates which they crave
when young), the initial old (who are taxed in the second period without having
a
received
they
prevent
one.
Stalinist
ment
social
they
the
not
symmetry
the
interest
rate
economy.
the
and
not
would
of
last:
asymmetry
at a
The
Even
perfect
some
of
sense.
to
Pare
but
alive
currently
economy
to
old
case
would
be
also
imple
But
this
is
obviously
ruled
reestablished,
in
upon
of
(instead
young
I have
be
improved
to the initial old")
keep
always,
his
put
of an
existence
transfers
the
from
taxing the
case
nongeneric
is as extreme
as the
in a few words
finger
initial
. . Must
.
beginning
the Lord
Welfare
generations model,
is
and
as
concise
mankind
economies
generations
there
from
we
and
period
forever
births
the
give mankind
on
the
of a
absence
an
end
as well
so let us tackle one
rested after the beginning,

constant."
Properties
failure of the first welfare
The
the
to
enough
planner.
and
the
time
Strange
is
case) would be Pare to improving because
between
give
as a beginning?
problem
but
by much,
that
in
extreme
could
their welfare.
Stalinist
lucid
"We must
welfare
all?an
rate
allocation
("pay no attention
the
Samuelson,
crucial
and
the welfare
at
interest
Transfers
decrease
its implication
preferences
off
improve the lot of all generations
to sacrifice
low
competitive
young to old in the Samuelson

old
worse
not
chocolate,
improving
chocolates
enjoy
that
initial
from
ready
are
They
about
for the benefit of all future generations, would
with
sense
the
high
planner,
did
the
off.
little
transfers.
old
out?then
to young would
(the initial old)
old-to-young
If
care
redistribution
old-to-young
consumers
in
off because
transfers from old
Hence
are worse
in the first)
transfer
are worse
is
puzzling.
because
in low interest rate overlapping

would
Pangloss
like
the
overlapping
all seems to be for the best in this best of all worlds:

there
competition,
theorem
Voltaire's
are
no
externalities
no
and
distortions.
So what
is going on?
The Wrong Answer
Let us startwith a dead end. It is tempting to think that inefficiency stems from
the
I
argued
tions model
are
of
impossibility
already
at
conducting
the outset,
is
only
present
an
at
the
trade
generational
interpretation.
the
with
beginning
and
previous
interpretation
We
of
could
time,
and
as well
meet
future
of
have
at
generations.
the
genera
overlapping
assumed
that date
as
But,
that
to trade
all
as
souls
they
in
wish
low interest rate economies.

of
trade
would
encounter
still
as we learn from Shell
Thus,
cannot
descendants
and
ascendants
with
we
markets:
Arrow-Debreu
complete
of
key
in
inefficiency
the impossibility
(1971)
the
be
123
the
explanation.
The Right Answer

us
Let
to a more
turn
subtle
but
germane
of the firstwelfare theorem fails in overlapping

let us
why,
one
proves
of
the world
leave
a
that
competitive
is
equilibrium
traditional
while
short
and
examine
in a
Pareto-optimal
proof
To understand
generations models.
for
Samuelson
The
argument.
static
how
exchange
economy.
that
Imagine
and
over,
to
compared
there
are
there
endowments
of,
the market
a
is not)
two
two
agents,
there
is
each
They
and
apples
of
fruits
have
preferences
oranges.
the
remember:
(and
reallocation
Pareto-improving
Paul.
goods,
perishable
outcome,
and
Jane
between
that,
Suppose
is to prove
point
and
Jane
Paul.
Say
IfJane is better
itmakes Jane strictlybetter off and leaves Paul's utility unchanged.
reallocation
of
fruits
must
the
because
be
it
off,
provides her with a
proposed
have
she would
at
the
of
her
utilitymore
and
Jane
value
of
(or more
gate
Paul
their
on
whose
is
had
more
spend
together
of
endowment
apples
on
and
of at
of that fruit. Hence

aggregate
is
least
one
supply
for
at
and
But
oranges.
fruits must
least
one
way
agents
good),
the
same
reallocation,
combined
and
two
goods
this implies that aggre
the aggregate
is infeasible
and
as
spends
the
than
two
with
and
the value
he
to obtain
oranges
exceed
reallocation
than
oranges
in the proposed
of agents and goods),
the
the proposed
apples
reallocation
unchanged,
a
been
(otherwise,
prices
proposed
and
apples
welfare
(if there
endowment
a finite number
generally
equilibrium
more
competitive
in the
Hence,
own).
spends
the
cheaply, Paul would have found it). Thus,
consumption
exceeds
at
afford
to Paul,
As
of his
value
the
her
Jane
prices,
endowment.
fruit
not
could
it on
selected
competitive
before
she
that
basket
consumption
as
endowment
(aggregate
a
result
demand
the market
Pareto-optimal.
this proof may break down. The key

In overlapping generations models,
is that with an infinite number of households and of dated goods?Shell's
(1971) double infinity?an allocation that is too expensive at market prices need not
be infeasible, so that the firstwelfare theorem need not hold. In a nutshell, if the
reason
value
is not
of
the
resources
necessarily
available
synonymous
to the economy
with
consuming
is infinite,
more
than
spending
more
on
goods
is available/
'
Here
of infinity. Index
of the strange mathematics
is, for the curious reader, a compact presentation
and endowments
of the fruits clhand eih,and
and Jane by h and fruits by i, call their consumption
measure
the price p? of the fruits in some num?raire. Wrhat we are saying is that a Pareto-improving
in the aggregate: E,,(2,-/>,- c/h)> 2/,(2,p? e?,?).
With two agents and two
reallocation must be too expensive
a finite number of agents and of goods), we can switch the two summation signs
goods (more generally
and 2^(2, p, ejh) =
on each side of this inequality. As a result, we can write 2/,(X,- p, cjh) = 2, p?C2,hO?
>
we
For
this
the
get ^?pj?Z,, c/h) JJjpj(JJ/!eih).
inequality to hold,
inequality,
ItjpjCZt, eih). Substituting into
we
Hence
i for which 2;, cih> E;, eih since prices are non-negative.
there must be at least one good
in a situation of "double
is infeasible. However,
reallocation
conclude
the proposed
infinity," the
Paul
124
The Gist of the Story

What do we learn from all this?
First,
resources
Samuelsonian
economies
are
different.
on
the
drastically
with
synonymous
"infeasible."
different
With
by
because
infinite
it is
Indeed,
allocation
competitive
are
economies
to
possible
infinite
is not
expensive"
in the Pareto
improve,
resources
redistributing
"too
resources,
with
from
young
sense,
to old
forever.
(1971) analogy with Gamow's

(1947) static room allocation problem
an
rooms
hotel with
infinite number of
is illuminating (the italics are mine):
Shell's
An
innkeeper has committed
beds
on
a certain
rainy
a bed can be found

bed.
In our
little
each of the denumerably
night.
guest
if the innkeeper
chocolate
of
but
occupied,
can
allocation
imposed
extra chocolate.
infinite number
all are
when
each guest tomove
requires
the
game,
for a bed
asks
in a
down one
one
produce
In the hotel problem, on the other hand, the

innkeeper by
an
will be able to produce a denumerable
allocation
imposing
infinityof extra
beds.
In a hotel with a finite number of rooms, it is not possible

without
market
someone
throwing
in the
and
street,
to produce
the first welfare
theorem
an extra bed
holds
absent
imperfections.
Samuelson's
Second,
in which
economies
stroke
of
the first welfare
was
genius
theorem
a model
to construct
holds,
always
absent
distortions, look like quite a special case. It ishard to escape

features
a world
overlapping
all, can we
after
exception:
against
the
of
the
where
seriously
of a model
realism
new
generations
that
are
are
model
generations
argue,
rests
once
entirely
always
coming
we
the
the
along?"
externalities
and
the conclusion
what
than
"new"
that
assumption
In
that the
rather
norm,
understand
on
that makes
that
the
means,
"we
live
in
it is not
respect,
the overlapping generations model, with the wealth of interesting issues it raises
and its rich welfare properties, that is a simple toymodel, but rather the competing
workhorse
assumes
of modern
that no
"new"
the
macroeconomics,
generation
ever
comes
Ramsey-Cass-Koopmans
as future
agents
along
model
are
all part
that
of
on debt
(1974)
pre-existing
neutrality and Weil
a
make
it
clear
that
such
model
if
(1987)
emerges only
parents love their children
to
future
leave
all
of
them positive bequests. This condi
(or
immigrants) enough
families. Barro's
famous paper
of the summation signs over households

and goods that we have performed might not be
that is
legitimate because of Fubini's theorem (Rudin, 1987, theorem 8.8), and as a result an allocation
too expensive
is not necessarily infeasible. This happens,
in particular, when the value of the aggregate
endowment 2^(2,p,
are dated
e/h) is infinite. If goods, as in the overlapping
generations model,
goods,
then i in fact indexes time. Normalizing
the initial price to 1, p1 is just the present value in the initial
+ r)-' if the interest rate is constant. As a result, the first welfare theorem
period of time i goods, or (1
fails to apply when r< 0, that is, in a Samuelsonian
economy with an interest rate below the (zero) rate
commutation
of population
Shell (1980)
growth. This argument was generalized

by Okuno
to economies with time-varying interest rates.
and Zilcha
(1981)
and Balasko
and
PhilippeWeil
tion
is very
rate
that
to
the
exceeds
always
overlapping
cure
To
the
that
in low
inefficiency
for
that
desire
literally
quite
interest
long-run
extraordinary
compared
interest
and
transfer
from
goods
interest
are market-based
there
to old
to old
youth
needs
that will reduce
the
that
it is
(remember
age
are
There
rate).
one
economies,
transfers from young
the
down
Samuelsonian
rate,
centralized
mechanisms
solutions.
Remedies
Centralized
most
The
to
drives
this,
doing
rate,
its
Inefficiency
consumers
of
is
with
model,
Ramsey
model.
a way to implement perpetual

desire
the
growth
generations
to Cure
How
therefore
and
restrictive,
125
obvious
is of course
way
to set
up
unfunded
pay-as-you-go,
straight
social security system that pays retirement benefits to the old from the taxes levied
on
their
young
perpetual,
of
collapse
will
population
of a pay-as-you-go
the
instance,
If n falls
by
rate
interest
grows fast (n >
system.
the
Pareto-improving,
for
n below
growth
deterioration. When
support
be
its elimination?motivated,
population
a democracy
To
contemporaries.
and
its elimination.
must
be
reversal
to a Pareto
lead
r), old and young are aligned
below
r, their
are
systems
Pay-as-you-go
system
unforeseen
r?will
interests
thus
in
in
and
diverge,
in an aging population,
it is likely that the old, whose weight is heavier
prevent
an
illustration
prime
of
the
difficulty of policy design in a democracy: the temptation to create them is large

(old and young will vote for them when growth rates are high) but once put in
are
they
place,
almost
of
economy
political
impossible
Another
social
security
are
who
of agents
tion,
labor
the
terminology7
out
crowds
ratio
and
raises
genera
overlapping
to think about the design and
systems.
of repaying national
debt
falls upon
to the
present
unconnected
(1965) who
public debt.
future generations
cohorts,
financing
public
debt raises the net wealth of the currently alive agents
deficits by issuing national

and
Samuelson's
inwhich
remedy is, following the work of Diamond

this approach into the overlapping generations model,
If part of the burden
(to use
out.
phase
centralized
first introduced
comprised
to
model
is thus, very naturally, the
tionsmodel
of Barro's
private
capital
the
interest
1974
seminal
rate.
increases
paper),
accumulation.
This
lowers
from
Starting
an
the
their
consump
long-run
capital
that, without
economy
public debt or unfunded social security, has an interest rate below the growth rate,
issuing public debt will be beneficial to all. In point of fact, from a normative
viewpoint, public debt should be increased up to the golden rule?the
optimum
optimorum
above
described
constant
without
level
ever
where
the
of
public
levying any
debt
taxes
interest
rate
equals
(if it spends nothing)
the government
At that point,
per
capita
to finance
from
one
the debt.
the
growth
rate.
can in effect roll over

generation
How
to
the
next
is this possible?
126
the
Suppose
borrows
government
b>
constant
0 from
each
cohort
young
and
(1 + r)b to each old. Since the young are 1 + n times more numerous
than the old in a growing economy, the system finances itselfwithout injection of
tax revenue provided that (1 + f)b ? (1 4- n)b?that
is, ifwe are at the golden rule
thus owes
where
n. Note
a world,
in such
that
the
has
government
freed
itself
to a Ponzi
equivalent
sense
in the financial
of future
a chain
scheme,
is
what
precisely
enables
and
game,
pyramid
(the value of the debt exceeds
This
surpluses).
or
letter,
itsdebt is
it is insolvent
the present discounted

to cure
the government
the
from
intertemporal budget constraint that ties down the actions of individuals:
value
through
a dose of public debt the inefficiency intrinsic to low interest rate economies.
The overlapping generations model disciplines the mind into realizing that
unfunded social security and public debt operate in a similar fashion. Indeed, it is
to be
inconsistent
logically
debt?unless,
public
are
redistribution
enous
labor
in
favor
of course,
on
to bear
brought
of
other
the
than
against
wealth
intergenerational
as moral
such
analysis,
and
security
or
hazard
endog
supply.
Cures
Decentralized
Samuelson
originally
the
proposed
"social
contrivance
inefficiency of low interest rate economies.

useless
intrinsically
prints
social
pay-as-you-go
considerations
of
"oblongs
of
Suppose
into
paper"
to cure
money"
the
the initial old generation

or
greenbacks
unusable
stamp
"circles of shells" that they offer in exchange for chocolates to the initial young. Will
the young accept paying a positive price for an intrinsically useless asset? The
answer is both no and yes: no, if they do not expect to be able to resell it later; yes,
if they do and can pass it on like a hot potato for a positive price to the next
In other
generation.
one
young,
multiple
at
closely
useless
that when
observe
words,
look more
us
Let
generation
Samuelsonian
money
note
as
In other
this
of
the money
is the only
it is
words,
If the
young
at
time
of
price
can
way money
role
an
is a
"money"
or
only
store
pure
t each
must
goods)
yield
buy
the
mt goods
to the
unfunded
social
with
currency
very
itdoes not facilitate
so
it cannot
and
interest,
of value,
worth
at
appreciate
rate
of return
in
offered
hyperinflation
that
can
its return
of risk, the real price ofmoney
thus
same
First,
them
(the sellers). Hence

as
of the word:
dividend
come solely from a capital gain. In the absence

inverse
same
the
no
it pays
goods
sell
are
that
to the old
(the buyers)
plays
the old
price,
the
result,
is valued.
money
as Reichmarks were during the German
even be used as a wallpaper

1920s.
positive
Samuelsonian
that
to barter,
compared
to the usual meaning
limited attributes compared

transactions
Samuelsonian
As
it is valued
when
Second,
system.
security
the
other.
circulate from the young
payment
of
the
when
have
greenbacks
after
exist.
equilibria
case
the
as
the
rate
of
nonmonetary
of Samuelsonian
money,
(the
interest:
assets.
the
real
value of themoney that they hold, and that theywill sell to the young born at t+ 1,
will thus increase to (1 + r)mt by the time they retire. Now what the old will sell, the
young
must
buy.
clearing requires
Since
there
that (1 +
are
r)mt
at any
time
1 +
young
for each
old
alive,
(1 + n)mi+l.
market
This
high
balances
us
helps
equation
rate
interest
understand
mt would
to
explode
Samuelsonian
why
Were
economies.
Samuelsonian
money
is inconsistent
infinity?which
with
real
a useless
of
price
asset
to grow
has
at
1 +
rate
r. If the
in
place
r>
when
since the resources of the young who buy it are limited at el. The
the
no
has
money
valued
127
real
n,
market-clearing
intuition is that
n at which
speed
buyers of this asset (the young) enter the economy falls short of the speed rat which
the
there
world,
we
supply.8 If
to economize,
uelsonian
mean
still be
would
say,
money
by
return
(1 4- n)mt+l
that
that
m =
the
room
for a
out
to low
interest
or
r>
by
will
fall
eventually
trading frictions in Samuelson's

that
currency
time.
shopping
not
n, but
asset
useless
fully-fledged
costs
transaction
is ruled
the
introduced
the
consumers
enables
The
existence
existence
of
we
of what
Sam
usually
"money."
us
Let
on
for
demand
aggregate
appreciates,
price
short of the aggregate
golden
e{. The
then
young
of
purchase
current
relates
rule
Samuelsonian
n can
rate
economies
and
future
be
devote
their
all
n. We
constant
balances
unwanted
old
the
r) mt
conclude
at
the
optimum
level
to
endowment
first-period
when
(1 +
expression
to rand
balances
real
consume
and
money
real
with
reached
to the
and
the
optimorum
+
+
+
+
golden rule level e2 (1 r)m? e2 (1 n)ex. This allocation is the same as the one
that would be reached by optimal social security transfers from young to old or by
issuing the right amount of public debt without levying taxes. In fact, the level of
that
debt
public
Samuelsonian
Like
redistribution
ment
from
the
young
to old
of
the
of
case
in the
long-lived
on
the use
informal
of.
social
. .
as a
greenbacks
contracts,
like
contract:
of
that does not default on itsobligations
consensus
low
and
system
social
rule,
golden
inefficiency
security
it is part
because
to
economy
cure
social
pay-as-you-go
"works"
money
can
money
a
the
brings
social
m.
b, equals
interest
rate
public
debt,
perpetual
security,
In
short,
economies.9
Samuelsonian
intergenerational
a
govern
long-lived
in the case of public debt, or "a grand

money
institutions,
of
and
The
exchange."
common
values
message
are
that
of utmost
importance for economic outcomes (Caillaud and Cohen, 2000) is not the least of
the lessons taught by the overlapping generations model. Like formal laws, they are
assets?a
characterization
I borrow
from
Kotlikoff,
Persson,
and
Svensson
(1988)?
thatmay be vital to reaching efficiency.
8
to be complete, we should also note that if r is larger than n in the absence of
For the reasoning
itwill be even higher when it is present and valued. The reason is buying money
Samuelsonian
money,
towards old-age and that an increased
when young and selling itwhen old involves shifting consumption
interest rate provides the incentive to do so.
9
in which Samuelsonian
I have mentioned
here that there exists an equilibrium
the station?r)7 equilibrium with valued currency. There
and I have described
is not valued,
money
is also a continuum
of
indexed by initial per capita real balances, which can be anything between 0
nonstationary
equilibria
real balances
that converge to zero and interest rates that
and m. All these equilibria feature declining
should not conclude, as
money. One
collapse back towards the value that prevails absent Samuelsonian
occurs because
the autarkic steady state is Pareto-suboptimal.
The
long thought, that indeterminacy
in an economy with strong income effects that there is no such
work of Grandmont
(1985) establishes
was
causality.
128
is another,
There
equivalent
rational asset bubble

greenbacks
useless.
intrinsically
in a
situation
analyzed
rate
interest
useless
intrinsically
exceeds
price
Samuelsonian
as
money
economies.
(r <
economies
the present
we
are
value
of
is valued,
currency
discounted
is, there is an asset bubble. Tir?le

for the existence of asset bubbles
generations
overlapping
asset
Rational
n) where
zero
(1985) has
in general
bubbles
of new
generations
ipso facto
the
occur
only
arrive
buyers
fast
in the economy. This result should not be a surprise: I am willing to pay for
enough
an
its real
where
equilibrium
in low
an
When
that it generates?that
exhaustively conditions
dividends
of
interpretation
that is relevant to the theory of finance. I have pointed out the

or stamped shells circulating in the
overlapping generations world are
more
asset
its fundamental
than
value
(the
discounted
present
value
of
future
dividends) only if I can sell it later to others. A rational asset bubble, like Samuel
I find someone to
sonian money, is a hot potato that I only hold for a while?until
it. The
catch
of new
arrival
consumers
the
generates
constant
flowr of new
to keep asset bubbles
partici
and similar chain letters going. The age-old

pants required
me
one
dollar in return for this postcard and send a similar
postcard game ("send
one dollar to 1 + r of your friends") is feasible and can go on
postcard requesting
forever if and only if its expansion rate r falls short of the arrival rate n of new
it
top of that, it is welfare-improving when feasible because
participants. On
then-needed
the
implements
of
transfers
logical corollary of the statement "models

are
holds
are
very
is thus:
extraordinary"
"economies
new
from
goods
inwhich
to old
participants.
the firstwelfare theorem always

asset
where
are
bubbles
never
possible
special."
Oversaving
Beyond
I earlier compared the overlapping generations model to theMona Lisa. One

feature of da Vinci's painting is thatMona Lisa's smile is seen differ
well-known
it seems to conveys depends on the

ently by each viewer, and that the meaning
position of the watcher. Similarly, each extension of the overlapping generations
reveals
approach
of
versatility
another
the
aspect
overlapping
of Samuelson's
generations
model.
model.
There
four
pick
examples
of course,
are,
many
of
the
more.
Intergenerational Risk Sharing

as Samuelson
I have so far proceeded
Disregarding
between
comparison
Samuelsonian
sense
many
interest
then,
postpone
of
and
classical
In
simplicity.
rates
did in 1958, ignoring uncertainty.

and dangerous.
It is convenient because the
rates
interest and growth
yields a sharp delineation of the
risk is both convenient
of
rates,
to assess
return:
like
the
on
growth
public
rates,
empirically
the answer
it is
cases;
real world,
to this
debt,
there
on
fluctuate
whether
question
however,
dangerous,
an
is
and
uncertainty,
capital,
over
economy
to the next
and
time
because
so on.
and
To
across
it
there
to address
how
or
are
matters,
aggravate
events:
is Samuelsonian
subsection
us a false
gives
as a result
are
we,
classical?
first a further
129
PhilippeWeil
more
and
serious
cannot
take
when
complication:
before
part
there
is
birth
their
in
the
uncertainty,
competitive
is never optimal because
generations model
librium of the overlapping
trades
risk-sharing
with
previous
This difficulty is specific to uncertainty and to insurance markets.

under
equi
the unborn
generations.
It does not arise
certainty.
is going on, imagine, for specificity, a version of the

overlapping generations model inwhich the splitof the constant aggregate endow
ment between young and old is random and decided by nature a minute before the
To
are
young
what
understand
born
and
to old
turns
youth
The
age.
are
young
too
born
they are
to share with their elders the risk to which
to be
late
Given
able
that only the
exposed.
split is random, young and old could pool their resources and avoid uncertainty
altogether if only they could meet before the realization of uncertainty. This
even with
is enough,
incomplete market participation
sequentially complete
Arrow-Debreu
to
markets,
outcome
This
in
stands
the
prevent
faultless
contrast
sharp
of
operation
with
the
the
invisible
case
certainty
hand.
as
where,
Shell
(1971) showed, it is immaterial whether or not the souls of the yet unborn meet at
the beginning of time. Under uncertainty, as pointed out by Chattopadhyay and
Gottardi
(1999), "we cannot find a sequential structure of markets where agents
trade only after they are born and which
as when
date."
agents
a
As
even
result,
absent
supports the same equilibrium
access
unrestricted
have
to a
complete
traditional
any
set of markets
market
failure
as
such
allocations
at
the
initial
distortionary
taxes, the equilibrium allocation of an overlapping generations model will always be

to be Pareto suboptimal:
left to their own devices, markets will not
expected
on
for)
But
are
is no
if there
under
"classical"
or
oversaving
oversaving
even
on whether
depend
is
there
out
crowd
not
does
whether
generations.
this Pareto-suboptimality
Remarkably,
it calls
across
risk
allocate
properly
not.
of course
can fill in for incomplete
therefore
welfare.
improve
in an
well-designed
scheme
vast
of
or
economy
there
is
that we
papers
to
that
uncertainty.
would
dub
redistribution
in insurance markets
strives
classical,
to old
young
intergenerational
participation
array
from
or not
whether
(for example,
a
transfers
Perpetual
intervention
is Samuelsonian
economy
beneficial,
oversaving
certainty),
(and the corrective public

the
characterize
and
can
optimal
social security schemes under uncertainty. A good starting point isBall and Mankiw
(2007), who offer an elegant characterization of the policies required to reach the
optimal
allocation.
This
discussion
shows that a distinction must
inefficiency (oversaving) and Pareto-suboptimality.

dynamically inefficient (or overaccumulates
capital)
not
reduce
increases
aggregate
it
in
some.10
consumption
Pareto-optimality
in
any
is a
future
be drawn between
dynamic
economy with capital is
if reducing capital today does
An
date
stronger,
or
event,
and
welfare-based,
10
The
actually
efficiency
literature on dynamic inefficiency dates back at least toMalinvaud

(1953). A criterion using bond
was developed
to
under
Cass
for
(1972) and generalized
inefficiency
certainty
detecting
prices
by
(1990, 1991).
uncertainty by Zilcha
130
that
criterion
requires
but also
possible,
not
the
only
of aggregate
"cake"
that it be optimally
as
be
consumption
agents. Hence
dynamic
the cake is not as big as it can
(because
inefficiency implies Pareto-suboptimality
be), but dynamic efficiency does not in general entail Pareto-efficiency.
under
certainty
the
uncertainty,
all
policies
failure
thus
in that
distortions):
to allocate
risks
efficient
dynamically
or
in Samuelsonian
needed,
Samuelsonian
case,
But under
across
properly
ones,
It does
economies
inefficient and Pareto-suboptimal.
of markets
even
allocations,
are
no
are both dynamically
with capital
renders
are
(if there
as
large
across
allocated
generations
Public
Pareto-suboptimal.
in classical
to achieve
economies,
the
optimal intergenerational risk sharing thatwould be reached under a Rawlsian veil

of ignorance. In Blanchard and Weil
(1991), my coauthor and I have studied the
existence and beneficial welfare properties of asset pricing bubbles in stochastic
shows
the
that
case
for
that
economies.
are
The
is not
overlapping
to use to think about social security?whether
model
real-world
efficient.
dynamically
transfers
intergenerational
to Samuelsonian
risk
economies
generations
overlapping
limited
This
argument
in the presence
is a
model
generations
or not dynamic
good
inefficiency is
problem.11
Inefficiency a Real-World Problem?

In a celebrated paper, Abel, Mankiw, Summers, and Zeckhauser
Is Dynamic
tigate
of
whether
empirically
actual
are
economies
(1989)
inves
Their
inter
efficient.
dynamically
rogation is essential because it could be that the exotic phenomena brought to light
(to name but a few: oversaving leading to a
by the overlapping generations model
low
interest
rate;
Pareto-improving
of
crowding-out
private
accumulation
capital
by
pay-as-you-go
security; public debt being beneficially transformed into a
asset
Ponzi game;
bubbles) are only theoretical possibilities that can happily be
shelved, after looking at the data, in the library of impractical and useless theories.
social
task
The
above,
the
set
authors
of
the presence
for
risk makes
is not
themselves
it
an
easy
to talk about
impossible
one
as noted
because,
"the"
rate.
interest
To
circumvent the difficulty of finding out which interest rate to consider and to skirt
the added complication stemming from the variation of interest and growth rates
over
time
and
events,
the
authors
devise
a clever
cash-flow-based
efficiency
crite
rion. Building on results by Phelps (1961), they show that an economy is "dynam
ically efficient" (I will explain the quotation marks in a short while) if and only if
goods
are
investors.12
always
Measuring
(at
every
date,
the direction
in every
state
of cash
of nature)
flows
from
flowing
national
out
of firms
income
to
accounts,
11
that have nothing to do with
There are aspects of social security programs
generations:
overlapping
for instance, the inability to make
time-consistent plans for the future and to adequately
provide for
the overlapping generations model
one's own retirement. Hence,
is certainly not the onlymodel of social
security.
12
The rationale
for this criterion is clear in steady state under certainty with constant population
growth
total return to capital is rK,where K is the aggregate capital stock, wrhile the investment
at the same rate as population
is nK. If the former exceeds
required to keep the capital stock growing
is classical.
the latter, then r> n and the economy
at rate n. The
that dynamic inefficiency does not seem to be a problem

in the 1925-1985
period or for the United Kingdom,
and
Japan between 1960 and 1984.
Italy, Canada,
they conclude
United
States
Germany,
must
results
These
be
care
with
interpreted
for
reasons.
three
131
for the
France,
the authors
First,
refer to dynamic inefficiency, but what they characterize is really Pareto-optimality,

as evidenced by the utility-based efficiency criterion that they provide.
Second, Abel, Mankiw, Summers, and Zeckhauser
(1989, p. 11) themselves
note
their
that
conclusion
empirical
that
real-world
are
economies
(Pareto)
efficient is valid only "if the economy behaves in the future as it has in the past."
and Kaul
Barbie, Hagedorn,
(2004) point out that the empirical implementa
et
al.
Abel
tion of the
criterion, which requires veri
(1989) Pareto-optimality
flow out
fying that goods

impossible:
to investors
of firms
statistical
conventional
can
methods
in every possible
is
future,
statements
make
about
what
"almost surely" (that is, with probability 1), but they cannot assert
will happen
sure
for
what will happen. For instance, flipping only heads in an infinite series
of tosses of a fair coin is very unlikely (it will almost surely not happen),
but it
is not
than
future
about
assumptions
used
those
to Zilcha
over
efficient
ically
paths
the
data
are
that
and
Summers,
1890-1999.
Kaul
weaker
under
conclude,
more
and
Zeckhauser
that the United
(1991),
period
and
Hagedorn,
the
of
Mankiw,
by Abel,
retical results due

be
Barbie,
Fortunately,
impossible.
plausible
and
States economy
is dynam
cannot
however,
Pareto-optimality,
theo
using
established.
we
inefficient,
librium
absent
the
what
state
any
would
of all
can
that
are
transfer
return
marginal
that
mechanism.
in a Lockean
to
out
crowd
below
the
growth
is, before
have
generations
is
The
been
In an
would
decreasing,
in
saving
rate?
that
asking
it exhibit oversaving?
capital
private
equi
in effect
of nature,"
across
goods
is dynamically
competitive
are
We
"state
physical
in a
reach
low interest rates?Would
the mechanisms
rates
interest
economy
like
an economy
would
transfer
that
it have
the
where
absence
the
look
institutions
market
economy
state
the
intergenerational
economy
and
to
refer
put in place. Would
in
we declare
third difficulty is subtle. When
The
physical
twentieth
the
assets
result
century
data
(1989) or Barbie, Hage

by Abel, Mankiw, Summers, and Zeckhauser
us about this fictitious
to
if
have
tell
and Kaul
little,
(2004)
anything,
examined
dorn,
reference point. During
used
to finance
many
Western
two world
wars,
and
countries,
unfunded
social
and
diamonds
gold
priced far above their fundamental

the many
given
current
private
the
out
ways
private
questions
capital
absence,
raised
of
seems
such
policies,
by
it would
Samuelson's
devised
no
to be
data
The
accumulation.
whether
value. What
have
societies
accumulation.
elimination
in their
our
there
generations,
capital
they examine, public debt was abundantly
the time period
as
do
not
pay-as-you-go
We
just
become
model
do
not
a host
and
were
to transfer
further
resources
rationale
on
provide,
assets
social
know
security,
how
from
for
their
own,
that
the economy
or
remain
in
deployed
of other
the data do tell us, however,
Samuelsonian
remain
systems
security
support
already
would
classical.
is that
to
future
crowding
relevant.
were
out
for
crowd
look
The
132
Economies
Keynesian
The
occur
can
that
in one-good
in the overlapping
and
As
process.
steers
the
that
sentence
the idea of generations

economic
of
inefficiency
possible
tomorrow,
happens
to anchor
way
selection device
used
this
and
expectations,
This
statics
ties down
thatmolds
equilibria.
to the one
identical
what
terminal condition
comparative
animal
is, for
spirits
the
instance,
(1986).
It is quite
in terms
of
IS-LM
to
by Samuelson
revealing
diagrams,
introduce
"Our point of view is that for some purposes
(p. 755):
as
described
is better
activity
its
almost
on
and Polemarchakis
conducts
which
no
inefficient
from
away
of Geanakoplos
this paper,
starts with
government
economy
explicit message
the
depends
becomes
turns into an equilibrium
public policy
and
today
happens
generations model,
the
result,
and
environments, turned in the 1980s into the

of the attempt to give solid microeconomic
foundations to
What
economics.
economies
exchange
in undistorted
competitive equilibria
theoretical playground
Keynesian
with the indeterminacy of equilibrium
generations model,
overlapping
without
process
end."
are
We
all,
indeed,
children.
Paul's
Finance
Behavioral
a key role in the development

overlapping generations model has played
of behavioral finance. In one of the founding papers of this literature, DeLong,
Shleifer, Summers, and Waldmann
(1990) introduce overlapping generations of
The
traders
noise
Summers,
the
in
tain
1990). Two
is no
the
of
result
striking
there
coexist
who
even
of
rational
traders
characteristics of the overlapping

that
that paper
fundamental
noise
on
uncertainty
model
generations
overlapping
cohorts
with
dividends.
that
risk.
Second,
and
Shleifer
generations model
affect
durably
asset
of a last
can
prices
the
of
ability
drive
even
prices
the absence
First,
ensures
of fundamental
in the absence
traders
also
(see
remain
when
period
uncer
to
arbitrageurs
revert to the mean is curtailed by factors

buy low and wait to sell high until prices
or
that
limit
their
economic horizons. The shorter the
institutional)
(biological
further
horizon,
the
presence
of noise
asset
traders.
prices
These
from
diverge
mechanisms
do
their
not
fundamental
rely
on
dynamic
values
in
the
inefficiency.
Conclusion
Einstein
General
(1924)
Theory,
of
the
reminded us, in the introduction

physicist
Ludwig
Boltzmann's
to Relativity: The Special and
warning
that
"matters
of
ele
gance ought to be left to the tailor and to the cobbler." Although aesthetic pleasure
is indeed not the metric of scientific achievement, the beauty radiating from the
striking simplicity the overlapping generations model has played a significant role
impact. What
in the paper's
verbatim
to
the
overlapping
Sassoon
generations
(2001) wrote about Mona
Lisa applies almost
model:
Philippe Weil
of
[M]any
those
standing
before
the Mona
or other
Lisa
famous
133
are
artefacts
left a little disconcerted.
By the cultural conventions of the twentieth century,

nor
she is neither beautiful,
sexy. The painting is not grandiose, or politically
Delacroix's
Libert?
like
is no gore, no
inspiring,
guidant le peuple. There
It does
violence.
Solow
until,
not
(2006) marveled
at
the
least,
very
/ thankMicael
tell a
story.
Just
at Samuelson's
the next
woman,
plain
"innocent
smiling
little device."
little.
So should we all
jubilee.
Castanheira, Fr?d?ricMalherbe, Etienne Wasmer, and the editorsfor their
comments.
References
H.
Abel, Andrew, N. Gregory Mankiw, Lawrence

and Richard J. Zeckhauser.
1989.
Summers,
and
Dynamic
Efficiency:
Theory
Review ofEconomic Studies, 56: 1-20.
S. Rao,
and Ellen R. McGrattan.
Aiyagari,
1998. "The Optimum Quantity of Debt." fournal
"Assessing
Evidence."
447-69.
ofMonetary Economics, 42(3):
1947. Economie et Int?r?t. Paris:
Allais, Maurice.
Imprimerie
Nationale.
and Karl Shell.

1980. "The
Yves,
Balasko,
I: The Case
Model,
Overlapping-Generations
of Pure Exchange
without Money."
Journal of
Economic Theory, 23(3):
281-306.
and N. Gregory Mankiw.
2007.
Ball, Laurence,
Risk Sharing in the Spirit of
"Intergenerational
to
and Rawls, with Applications
Arrow, Debreu,
Social Security Design." Journal ofPolitical Econ
omy, 4(115):
523-47.
and Ashok
Barbie, Martin, Marcus Hagedorn,
Kaul.
Tests of Effi
2004. "Assessing Aggregate
for Dynamic
Economies."
in
ciency
Topics
Macroeconomics,
4(1).
1974. "Are Government
Barro, Robert.
Net Wealth?"
Brown, E. Cary, and Robert

Paul
Samuelson
and Modern
Journal ofPolitical Economy, 81(6):
Solow.
1983.
Economie
Theory.
McGraw-Hill.
and Daniel
Cohen.
2000.
Caillaud,
Bernard,
Transfers
and
Common
"Intergenerational
in a Society." European Economie Reviexv,
Values
1091-1103.
44(4-6):
1972. "On Capital Overaccumu
Cass, David.
lation in the Aggregative Neoclassical
Model
of
Economic
Growth:
A Complete
Characteriza
ofEconomic Theory, 4(2): 200-223.
E. Yaari.
1966. "A
Cass, David, and Menahem
of the Pure Consumption
Re-examination
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Overlapping Generations The First Jubilee

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American Economic Association

Overlapping Generations: The First Jubilee

22, Number 4?Fall

Journal ofEconomie Perspectives?Volume

feeling of surprise at its originality and coolness

have not paled with the

that violates the credo of the first

with the many

of all, this failure of the firstwelfare

Philippe Weil isProfessor ofEconomics, Universit? Libre de Bruxelles (European Centrefor

Journal ofEconomie Perspectives

in 2005. Interestingly, Solow confesses that he forgot to

90th birthday celebration

framework to impose itself on the profession. The Kareken and Wallace

thought, is instead to highlight what

to the history of economic

Birth and Death

little green people deposited on our planet by storks or aliens, or

his early training in France tomention

strated early on by Shell,

immigrants in a society in which they are cherished and

as a limiting case of the

should therefore think of the Ramsey model

are comprised of "new" agents implies that the total

to zero. I will return to this insight below.

zero probability, as in my model of overlapping

Journal ofEconomie Perspectives

that there is only one

stemming from the date of birth.

in the first and second periods

rather than discretely, yield similar insights although

time flows continuously

("almost infinitely impa

they mostly enjoy eating when young

and must feel happy about

they are just like me),

borrow from me.

The recursive competitive

Overlapping Generations: The FirstJubilee

that it starts to matter

transfers from young

lies the symptom of the Pareto

this is one of the

sub-optimality of the competitive

is that there is no one with whom

For agents to be happy with this situation?and

fascinating features of overlapping

the lot of every generation:

Journal ofEconomie Perspectives

itwill be more beneficial

return to storage is decreasing,

is fixed by the linear production

Left to their own devices,

improving. For each generation,

young to old is Pareto

r)el in the competitive equilibrium.

young, but they get them back with a vengeance.

1, from young to old. The old in the initial time

to the equilibrium with nonstorabie

result, their old-age consumption

to the old. The

(1 + n)T to each older person. Although

e2 instead of e,2in the competitive allocation.