An overlapping-generations model with data-driven equilibrium behavior

Abstract

We propose a class of overlapping generations models that can serve as a workhorse for policy analysis. Recent literature identifies several features of key observable economic variables in Europe and the U.S.: the life-cycle path of earnings is hump-shaped, while the aggregate variables — per-capita consumption and labor hours — exhibit a clear time trend. Our class generates non-monotonic life-cycle behavior of labor supply and the desired aggregate trends in all its balanced-growth equilibria (BGE). There is a finite number of these equilibria and at least one of them exists provided a single-generation consumer problem has a solution. The model has a constant-returns-to-scale production, non-trivial depreciation of capital, exogenous labor-saving growth and an arbitrary individual life-cycle productivity. The necessary restrictions imposed on preferences are consistent with those generating the aggregate trends in a representative-agent economy, while ruling out popular specifications such as Cobb–Douglas or CES. We characterize BGE with MaCurdy preferences and solve a parametrized model that yields at least two stationary equilibria with reasonable interest rates. The hump-shaped life-cycle consumption profile can be generated with an additional parameter interpreted as reflecting family structure or a desire for immediate gratification that peaks at mid-life.