Dynamic efficiency in overlapping generations models with stochastic production
Abstract We consider an overlapping generations economy, as in Diamond (Amer. Econ. Rev. 55 (1965), 1126–1150), with stochastic production. We define two types of efficiency for feasible production-consumption allocations, using first and second degree stochastic dominance. We obtain a complete characterization of inefficiency (of type I) in this model. For each given sequence of strictly concave utility functions (for all generations) the existence of a competitive equilibrium is proved. It is shown that each competitive allocation is short-run efficient (of type II).