References and Literature

The baseline overlapping generations model with two-period lived agents is due to Samuel­son (1958) and Diamond (1965). A related model appears in French in Maurice Allais' work.

The economy studied in Section 9.1 is due to Shell (1974). The source of inefficiency in the overlapping generations model is much discussed in the literature. Shell's (1974) example economy in Section 9.1 provides the clearest intuitive explanation for why the First Welfare Theorem does not apply. A lucid discussion is contained in Bewley (2006).

The model of overlapping generations with impure altruism is due to Andreoni (1989). This model has been used extensively in the economic growth and economic development literatures, especially for the analysis of equilibrium dynamics in the presence of imperfect capital markets. Well-known examples include the models by Aghion and Bolton (1996), Banerjee and Newman (1989, 1994), Galor and Zeira (1993) and Piketty (1996), which we will study in Chapter 21. I am not aware of an analysis of wealth inequality dynamics with perfect markets in this economy along the lines of the model presented in Section 9.6, even though the analysis is quite straightforward. A similar analysis of wealth inequality dynamics is included in Stiglitz's (1979) model, but he assumes that each household can only use its savings in its own diminishing return technology (thus creating a strong force towards convergence of incomes).

The continuous time perpetual youth model is due to Yaari (1965) and Blanchard (1985). The discrete time version of this model was presented to facilitate the transition to the contin­uous time version. Our treatment of the continuous time version closely followed Blanchard (1985). Blanchard and Fischer (1989, Chapter 3) and Barro and Sala-i-Martin (2004, Chap­ter 3) provide clear textbook treatments. The importance of the path of labor income is emphasized and analyzed in Blanchard (1985). The importance of new arrivals in the market is emphasized and explained in Weil (1989).

Models with overlapping generations and finite lives are used extensively in the analysis of Ricardian Equivalence, introduced in Exercise 8.19 in Chapter 8, is a good approximation to reality. Blanchard (1985) and Bernheim (1987) include extensive discussions of this issue, 376

while Barro (1974) is the reference for the original statement of the Ricardian Equivalence hy­pothesis. Another important application of overlapping generations models is to generational accounting, for example, as in the work by Auerbach and Kotlikoff (1987).

9.11.