Overlapping Generations Model
Young savers, old dissavers, a workhorse for pensions, bubbles, and dynamic inefficiency.
Definition
The overlapping-generations model: cohorts live two periods (work young, retire old), so the economy is a chain of trades between the young and the old.
Key equation
Young's saving = old's consumption; dynamic inefficiency possible when r < g
The intuition
Because no one lives forever, markets can misprice the future: economies can over-accumulate capital, and pay-as-you-go pensions or even bubbles (money itself!) can make everyone better off by passing resources between generations, impossible in Ramsey.
Exam tip
OLG is the framework for ANY question about pensions, demographic transitions, or rational bubbles.
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