Staff Report 282

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On the Equilibrium Concept for Overlapping Generations Organizations

Edward C. Prescott - Senior Monetary Advisor
José-Víctor Ríos-Rull - Consultant

Published November 1, 2000

A necessary feature for equilibrium is that beliefs about the behavior of other agents are rational. We argue that in stationary OLG environments this implies that any future generation in the same situation as the initial generation must do as well as the initial generation did in that situation. We conclude that the existing equilibrium concepts in the literature do not satisfy this condition. We then propose an alternative equilibrium concept, organizational equilibrium, that satisfies this condition. We show that equilibrium exists, it is unique, and it improves over autarky without achieving optimality. Moreover, the equilibrium can be readily found by solving a maximization program.

Published In: International Economic Review (Vol. 46, No. 4, November 2005, pp. 1065-1080)

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