Define a competitive equilibrium

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Reference no: EM131136016

Consider the canonical OLG model with log preferences and a Cobb-Douglas production function (as in Exercise 9.8).

(a) Define a competitive equilibrium.

(b) Characterize the competitive equilibrium, and derive explicit conditions under which the steady-state equilibrium is dynamically inefficient.

(d) Show that when there is dynamic inefficiency, it is possible to construct an unfunded social security system that creates a Pareto improvement relative to the competitive allocation.

Exercise 9.8

Consider the canonical model with log preferences, log(c1(t)) + β log(c2(t)), and the general neoclassical technology F(K, L) satisfying Assumptions 1 and 2 (see Chapter 2). Show that multiple steady-state equilibria are possible in this economy.

Reference no: EM131136016

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