Competitive equilibria and the core of overlapping generations economies (Q914535)

This paper shows that the classical set of competitive allocations (competitive allocations which are not compatible with monetary equilibria) in an overlapping generations economy is a subset of the core, that equilibria with ``too much money'' are not in the core, and that for large (replica) economies no monetary equilibrium allocation belongs to the core. These results are interpreted as formalizing the observations on money that (1) it is a ``social contrivance'' (R. W. Clower, ``Introduction'', in ``Monetary theory'', Penguin, Hammondsworth, 1969); (2) ``Walras allocations [with money] are trustworthy... only because there is... a government which can enforce... the payment of [money] taxes'' [\textit{D. Gale}, J. Econ. Theory 19, 456-491 (1978; Zbl 0413.90012)]; and (3) the social acceptability of money is due to its role as a medium of exchange rather than as a store of value (the authors). The model is a standard \(\ell\)-commodity overlapping generations economy with n agents per generation, each living two periods. Agents have strictly monotone utility functions with indifference surfaces having curvature uniformly bounded above and below. Equilibrium allocations are uniformly bounded above and below, and supported by a sequence of prices such that within-period price ratios are uniformly bounded away from zero. These assumptions guarantee applicability of the characterization of efficiency of \textit{Y. Balasko} and \textit{K. Shell} [ibid. 23, 281-306 (1980; Zbl 0455.90008)]. The central notion is the classical set of competitive allocations. An endowment allocation \(\omega\) is consistent with an equilibrium allocation x (\(\omega\in \Omega (x))\) if \[ p^ t\omega^ t_{t,j}+p^{t+1}\omega^{t+1}_{t,j}=p^ tx^ t_{t,j}+p^{t+1}x^{t+1}_{t,j} \] for \(t\geq 1\) and \(j=1,...,n\), where \(p^ t\in {\mathbb{R}}_+^{\ell}\) is the period t price vector, normalized so \(p^{1,1}=1\), and \(x^ t_{s,j}\in {\mathbb{R}}_+^{\ell}\) (resp. \(\omega^ t_{s,j})\) is the consumption (resp. endowment) vector of the j-th consumer born in period s for period t. Furthermore, \(\omega\) is sequentially consistent with x \((\omega \in \Omega^ s(x))\) if \(\omega\in \Omega (x)\) and \[ \liminf_{t\to \infty}\max_{j}p^ t(x^ t_{t,j}-\omega^ t_{t,j})\leq 0. \] (In the long run, each agent balances her budget period by period.) The classical set is \(\{\) \(x|\Omega (z)=\Omega^ s(x)\}\). (Classical allocations cannot be equilibria with inside or outside money.) Proposition 1: An allocation x supported by prices p is classical iff \(\liminf_{t\to \infty}\| p^ t\| =0.\) Since the sum of the inverse of prices diverges, any classical allocation is efficient by the Balasko-Shell criterion. Clearly, any autarkic competitive equilibrium is in the core. However, this may not be true for all endowments supporting a given allocation: Proposition 5: Fix x. x belongs to the core for all \(\omega\in \Omega (x)\) iff x is classical. Proposition 6 states that fixing a monetary equilibrium there is K so that for \(k>K\) the equilibrium is not in the core of the k-replica economy.