Dominant root characterization of Pareto optimality and the existence of optimal equilibria in stochastic overlapping generations models

Aiyagari, S. Rao; Peled, Dan

doi:10.1016/0022-0531(91)90105-d

Cited by 49 publications

(56 citation statements)

References 19 publications

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“…This equation corresponds to Equation (3) in Peled (1984) or Equations (4) and (5) in Aiyagari and Peled (1991).…”

Section: Central Planning Problemmentioning

confidence: 99%

“…Shell (1977) applies the Arrow-Debreu contingent claims framework to the overlapping generations model in a deterministic setting to show that a competitive equilibrium may not be Pareto optimal if the discounted present value of wealth in the economy is infinite. Peled (1982Peled ( , 1984 and Aiyagari and Peled (1991) study the characterization of Pareto optimal solutions and the existence of competitive equilibria in stochastic, pure endowment economies. Aiyagari and Peled show that a competitive equilibrium is Pareto optimal if and only if a matrix of contingent claims prices that support the equilibrium allocation displays certain properties, in particular that the dominant root of the matrix is positive and less than one.…”

Section: Financial Intermediary Depositsmentioning

confidence: 99%

“…The issues in defining Pareto optimality in these settings have been discussed by Muench (1977), Peled (1982Peled ( , 1984, Manuelli (1990), and Aiyagari and Peled (1991), among others. I examine the risk-sharing arrangements associated with different concepts of optimality, including how these arrangements are financed.…”

Section: Introductionmentioning

confidence: 99%

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Aggregate risk sharing and equivalent financial mechanisms in an endowment economy of incomplete participation

Labadie

2004

Economic Theory

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A pure endowment overlapping generations economy can be inefficient because of insufficient risk sharing. The introduction of an outside asset by a government or the existence of a clearing house can remedy the inefficiency by allowing some intergenerational risk sharing. While the typical outside asset is fiat money, many alternative financial mechanisms, such as social security, risk-free government bonds, “mispriced” deposit insurance, and income insurance can serve the same function as fiat money. Hence there are many equivalent financial mechanisms that provide intergenerational insurance. In the presence of uncertainty, there are several concepts of Pareto optimality that can be appropriately applied in an overlapping generations setting. I examine the risk-sharing arrangements associated with two different concepts of optimality, including how these arrangements are financed. The results are related to, and in some instances an extension of, the equivalence results obtained by Chamley and Polemarcharkis (1984), Weiss (1977), and Wallace (1981). Copyright Springer-Verlag Berlin/Heidelberg 2004Dynamic inefficiency, Aggregate risk sharing, Overlapping generations.,

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“…This equation corresponds to Equation (3) in Peled (1984) or Equations (4) and (5) in Aiyagari and Peled (1991).…”

Section: Central Planning Problemmentioning

confidence: 99%

Section: Financial Intermediary Depositsmentioning

confidence: 99%

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Aggregate risk sharing and equivalent financial mechanisms in an endowment economy of incomplete participation

Labadie

2004

Economic Theory

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“…This is reminiscence of the Dominant Root, or Perron-Frobenius, Characterization (Aiyagari and Peled [3]) for recursive equilibria in stochastic overlapping generations economies. Hence, our characterization is tight, as it exploits the same criterion for possibly non-recursive equilibria.…”

Section: Introductionmentioning

confidence: 99%

Asset prices, debt constraints and inefficiency

Bloise

Reichlin

2011

Journal of Economic Theory

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Abstract. In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained inefficiency corresponds to a feasible redistribution yielding a welfare improvement beginning from every contingency reached by the economy. A sort of Cass Criterion (Cass [10]) completely characterizes constrained inefficiency. This criterion involves only observable prices and requires low interest rates in the long-run, exactly as in economies with overlapping generations. In addition, when quantitative limits to liabilities arise from participation constraints, a feasible welfare improvement, subject to participation, coincides with the introduced notion of constrained inefficiency.

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“…We mention two issues that require further investigation. The welfare properties of FSSE are easily studied and it is known that they are exante inefficient while their optimality properties under a weaker (conditional) notion of optimality is easily checked using the "unit root property" due to Aiyagari and Peled (1991); in the case of FSE, while it is easy to show that they too are exante inefficient, their welfare properties under a conditional notion of optimality are not clear since they induce nonstationary paths and an answer requires the use of the criterion for optimality developed by Chattopadhyay and Gottardi (1999) and poses an interesting challenge. Also, the precise relation between FSE and the more general class of sunspot equilibria studied by Woodford (1986) and Woodford 9 In addition to requiring that there be two steady states, the existence of random walk equilibria also imposes conditions on the transition probabilities of a random walk money supply where money transfers are proportional.…”

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confidence: 99%

Functional sunspot equilibria

Chatterji

Chattopadhyay

2006

Journal of Mathematical Economics

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Consider a one step forward looking model where agents have beliefs about the law of motion of the system, and their forecast for the next period is made with knowledge of the past values of the state variable but not the current value, and is allowed to depend on the current realization of an extrinsic random process. The paper provides (and characterizes) the conditions for the existence of sunspot equilibria for the model described.

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Dominant root characterization of Pareto optimality and the existence of optimal equilibria in stochastic overlapping generations models

Cited by 49 publications

References 19 publications

Aggregate risk sharing and equivalent financial mechanisms in an endowment economy of incomplete participation

Aggregate risk sharing and equivalent financial mechanisms in an endowment economy of incomplete participation

Asset prices, debt constraints and inefficiency

Functional sunspot equilibria

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