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Overlapping generations economy


A discrete-time dynamic economic model in which individual agents have finite lives, but each lives for more than one period. In each period there will be a new generation of agents who were not there before, and an old generation for whom this is their final period. If the economy is assumed to continue indefinitely an overlapping generations economy has the special feature that the number of consumers and the number of (dated) goods are both infinite when the entire lifespan of the economy is taken into account. As a consequence of this double-infinity the competitive equilibrium of an overlapping generations economy can be Pareto inefficient. Overlapping generations models are widely used in analysing savings behaviour, pension schemes, and security markets. See also dynamic inefficiency; golden rule.

Reference: Oxford Press Dictonary of Economics, 5th edt.