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We quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks and permanent productivity differences of households. The optimal capital income tax rate is significantly positive at 36 percent. The optimal progressive labor income tax is, roughly, a flat tax of 23 percent with a deduction of $7,200 (relative to average household income of $42,000). The high optimal capital income tax is mainly driven by the life-cycle structure of the model, whereas the optimal progressivity of the labor income tax is attributable to the insurance and redistribution role of the tax system.

We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth—of wealth inequality in particular—on various fiscal policy instruments like capital income taxes and estate taxes, and on different degrees of social mobility. We show that capital income and estate taxes can significantly reduce wealth inequality, as do institutions favoring social mobility. Finally, we calibrate the economy to match the Lorenz curve of the wealth distribution of the U.S. economy.

We propose a model of cycles of conflict and distrust. Overlapping generations of agents from two groups sequentially play coordination games under incomplete information about whether the other side consists of bad types who always take bad actions. Good actions may be misperceived as bad and information about past actions is limited. Conflict spirals start as a result ofmisperceptions but also contain the seeds of their own dissolution: Bayesian agents eventually conclude that the spiral likely started by mistake, and is thus uninformative of the opposing group's type. The agents then experiment with a good action, restarting the cycle.

We develop an economic model to derive the conditions under which individuals will invest in human capital and move on to adopt sustainable technology instead of natural resource-intensive technology. For this purpose, we extend the overlapping generation model developed by Ikefuji & Horii as our analytical framework. Unlike Ikefuji & Horii who developed an overlapping generation model (OLG) in the context of local pollution, the authors adopted it in the context of renewable natural resources. To do this, we have introduced the production sector that relies on natural resource-intensive technology. This research extends beyond the Ikefuji & Horii model by assuming that an individual derives utility by investing in his child’s education apart from utility derived from consumption when young and adult. Human capital accumulation enables individuals to participate in human capital-intensive production, which produces output through sustainable production technology. As the main result of our theoretical analysis, we find that more educated individual is less dependent on the natural resource endowment for earning their income. We also find that sustainable consumption growth requires that individuals assign a certain positive weight to investment in their child’s education. A long-run steady-state equilibrium level of human capital accumulation is higher and higher than the weight assigned by the parents to the child’s education. In this overlapping generation’s economy, sustainable consumption growth requires that individuals assign a certain weight or give some importance to human capital accumulation. This follows from the fact that the long-run steady-state value of the income earned by an individual depends positively on the expenditure on education.

Population aging, along with a secular decline in real interest rates, is an empirical regularity observed in developed countries over the last few decades. Under the premise that population aging will deepen in coming years, some studies predict that real interest rates will continue to be depressed further to a level below zero. In this paper, we address this issue and explore how changes in demographic structures have affected and will affect real interest rates, using an overlapping generations model calibrated to Japan’s economy. We find that the demographic changes over the last 50 years reduced the real interest rate. About 270 out of the 640 basis points decline in real interest rates during this period was due to declining labor inputs and higher saving, which themselves stemmed from the lower fertility rate and increased life expectancy. As for the next 50 years, we find that demographic changes alone will not substantially increase or decrease the real interest rate from the current level. These changes reflect the fact that the size of demographic changes in years ahead will be minimal, but that downward pressure arising from the past demographic changes will continue to bite. As Japan is not unique in terms of this broad picture of changes in demographic landscapes in the last and next 50 years, our results suggest that, sooner or later, a demography-induced decline in real interest rates may be contained in other developed countries as well.

Research background: Many people in Japan and other countries believe that national finances will not stand still and will go bankrupt if deficits continue at present level. It is like a religion. In this paper, however, we prove that this religion is wrong by using a simple mathematical model. Research methodology: This paper uses a macroeconomic model based on microeconomic foundations for consumers and firms with overlapping generations of consumers under monopolistic competition. Results: Although fiscal failure or collapse is generally defined as the government debt to GDP ratio going beyond a finite value to an infinite value, i.e., diverging, the following analysis theoretically proves that such a failure does not occur under stable prices or under a constant inflation rate. It is often said that the government debt to GDP ratio will continue to increase if the interest rate on government bonds exceeds the economic growth rate, but we prove that such a fiscal failure does not occur even when the interest rate of government bonds exceeds the growth rate. This paper shows that the debt to GDP ratio converges to or remains at a finite value over time and that the budget deficit over a given period is equal to the difference between the savings of the younger generation of consumers and the savings of the older generation of consumers. Novelty: There are few papers that analyze the fact that financial collapse does not occur using mathematical models, and it is worthwhile to do so.

In this paper, we study economic dynamics in a standard overlapping generations model without production. In particular, using numerical methods, we obtain a necessary and sufficient condition for the existence of a topological chaos. This is a new application of a recent result characterising the existence of a topological chaos for a unimodal interval map by Deng et al. (J Econ Theory 201:105446, 2022 ).

In this paper, we consider the effects of population aging on a pay-as-you-go financed defined contributions pension scheme. We show that when retirement decisions are endogenous, aging increases the retirement age and the steady-state level of capital. The effect on pension payouts is in general ambiguous, except for the solution of full retirement, when this effect is unambiguously negative.

We use an overlapping generations model to study the challenge in developing countries with a large informal sector and aging population. We use Thailand as a case study and incorporate its labor market structure and its public pension system into the calibrated model. Unlike developed countries, workers in developing countries commonly transit from the formal sector to the informal sector, which can be in the early stage of their working life. This labor market feature crucially limits the coverage of the contributory social security (SS) system. We find that 66% of Thai elderly (aged 60 or over) are ineligible for SS annuity benefits because of an insufficient number of years paying into the SS fund. In addition, we use our model to evaluate two schemes to raise the existing universal basic pension income to the poverty line, namely, uniform benefits and pension‐tested benefits. We find that pension‐testing effectively improves the targeting efficiency, and nontrivially lowers the cost of the basic pension income program.

We incorporate the external effects of capital in production and endogenous technology choice into the standard overlapping generations model. We demonstrate that our model can exhibit a poverty trap, a middle-income trap, and perpetual growth paths. We also show that, under some economic conditions, an economy exhibits all three of these phenomena, depending on its initial capital level, and that the economy caught in the middle-income trap can exhibit chaotic fluctuations in the long run. This is a stark contrast to the result obtained by Umezuki and Yokoo (J Econ Dyn Control 100:164-175, 2019a) that we cannot observe any chaotic fluctuations. Because the model of Umezuki and Yokoo (2019) is a special case of our model in the sense that there is no externality in production, our result means that we need the combination of technology choice and externalities in production to obtain chaotic fluctuations in the standard overlapping generations model with Cobb-Douglas technologies.