Diamond and the Ramsey growth models
3 The Diamond OLG Model
We want to build a theoretical framework with multiple generations, which
co-exist at the same time. We want to have the possibility of economic decisions that have intergenerational consequences. In this new framework saving decisions should take into account the fact that people retire. Finally,we want to be able to talk about economic efficiency.
Indeed, the scope of OLG models should not only be purely descriptive of reality, but also to suggest policy that can improve economic outcomes and welfare of the economy. Concrete examples are:
• How should we design a sustainable pension system?
• Should we tax bequests?
• What is the best design for the education system?
• What is an efficient design for pollution control?
OLG models are useful to study pensions (the main reason for households
saving) and fiscal policy.
If you think about it, government obligations tend
to be indefinite, while those of individuals are limited to their life time. This
mismatch of interests can generate relevant issues: