Background
An overlapping generations economy is a conceptual framework used to understand economic dynamics where individuals live for more than one period but less than indefinitely. This model helps explain how different generations interact economically within a given timeframe.
Historical Context
The overlapping generations model was first introduced by economist Maurice Allais in 1947 and further developed by Paul Samuelson in the 1950s. This approach was instrumental in studying long-term economic issues such as savings behavior, social security systems, and fiscal policy.
Definitions and Concepts
An overlapping generations economy operates in discrete time, where each agent lives for a finite number of periods and new agents are continually born while old agents exit the economy. This results in multiple generations co-existing and interacting at any given time.
Major Analytical Frameworks
Classical Economics
The classical view primarily focuses on the production and distribution of resources but generally does not account for the heterogeneity of agents over different periods, which is the unique focus of overlapping generations models.
Neoclassical Economics
Overlapping generations models are often embedded in neoclassical frameworks to analyze intertemporal choices and Pareto inefficiencies that might arise from long-run equilibria.
Keynesian Economics
These models can be used to study the effects of fiscal policies over multiple generations and the implications of government interventions on long-term economic stability.
Marxian Economics
The overlapping generations framework can be employed to explore the implications of capital accumulation and the distribution of wealth over different generational cohorts.
Institutional Economics
Here, the focus is on how different institutions (such as pension systems) influence economic behaviour across generations, and how these institutions evolve over time.
Behavioral Economics
Examines how bounded rationality and intergenerational behavioral patterns affect economic decisions, such as savings and consumption.
Post-Keynesian Economics
These models are used to analyze issues like the sustainability of public debt and the long-term effects of monetary policy from a generational perspective.
Austrian Economics
Focuses on individual choice and time preference but usually operates under a different time framework not explicitly incorporating overlapping generations.
Development Economics
Explores how transferring knowledge, skills, and resources across generations can impact long-term economic growth and development.
Monetarism
Examines the role of monetary policy in influencing savings and investment behaviors across multiple generations, affecting overall economic equilibrium.
Comparative Analysis
When comparing the overlapping generations economy with other economic models, one must consider the unique feature of ‘double-infinity’ — the presence of infinite consumers and infinite goods across the entire lifespan of the economy. This creates computational complexities and significant deviations from models with finitely-lived agents, leading to potential Pareto inefficiencies.
Case Studies
- Modeling Social Security Systems: Examines the sustainability of pension schemes when contributions and benefits are analyzed across overlapping generational cohorts.
- Housing Market Dynamics: Exploring how different age groups interact in housing markets and the resultant long-term price trends.
Suggested Books for Further Studies
- “The Overlapping Generations Model” by Eggertsson, G.
- “Dynamic Fiscal Policy” by Dimitrios D. Thomakos
Related Terms with Definitions
- Dynamic Inefficiency: A situation where resources are not optimally allocated over time in an economy.
- Golden Rule: The optimal level of capital accumulation where the marginal product of capital equals the growth rate of the economy.
By navigating these frameworks and contexts, an overlapping generations economy provides profound insights into the intertemporal behavior and policies affecting multiple generations.
