| Abstract: |
I show in this paper that in an overlapping generations economy with
production à la Diamond (1970) in which the agents can only save in terms of
capital (i.e. with not asset bubbles à la Tirole (1985) or public debt as in
Diamond (1965)), there is a period-by-period balanced fiscal policy supporting
a steady state allocation that Pareto-improves upon the laissez-faire
competitive equilibrium steady state (whithout having to resort to
intergenerational transfers) if there is no first generation or the economy
starts there. A transition from the competitive equilibrium steady state to
this other allocation is also Pareto-improving if the former is dynamically
inefficient, but even in the dynamically efficient case if the elasticity of
output to capital is high enough. This intervention allows every subsequent
generation to attain, as a competitive equilibrium outcome, the highest
utility attainable at a steady state through the existing markets for the
consumption good and the production factors. The active fiscal policy consists
of taxing (or subsidizing, in the dynamically efficient case) linearly the
returns to capital, while balancing the budget period by period through a
lump-sum transfer (or tax, respectively) on second period income. This policy
does not finance any public spending, since there is none in the model. The
only purpose of the intervention is to decentralize as a competitive
equilibrium the steady state allocation that maximizes the utility of the
representative agent among all steady state allocations attainable through the
existing markets. |