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Choosing Longevity with Overlapping Generations: To Be or Not to Be in Diamond's Model

Author

Listed:
  • Chen Weichun

    (University of Victoria)

  • Engineer Merwan H

    (University of Victoria)

  • King Ian P

    (University of Melbourne)

Abstract

We extend Diamond's (1965) OLG model to allow agents to choose whether to participate in the second period of life. The valuation of early exit (x) is a key parameter. We characterize competitive equilibria, efficient allocations, and predictions for income and life expectancy over time. We find that, with logarithmic utility, for any value of x, there is a range of initial values of the capital stock for which some agents would prefer to exit in equilibrium. The shape of the transition function and the number of steady state equilibria depend crucially on the value of capital's share of income.

Suggested Citation

  • Chen Weichun & Engineer Merwan H & King Ian P, 2008. "Choosing Longevity with Overlapping Generations: To Be or Not to Be in Diamond's Model," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-39, February.
    • Handle: RePEc:bpj:bejmac:v:8:y:2008:i:1:n:6
    DOI: 10.2202/1935-1690.1636
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    References listed on IDEAS

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