Efficiency and Lack of Commitment in an Overlapping Generations Model with Distributional Shocks∗

This paper considers a pure exchange stochastic overlapping generations model in which agents live for two periods. At each date, either a young or an old agent has larger endowments than the other, which is stochastically determined. In addition to the uncertainty, commitment cannot be externally enforced in this economy. In this environment, I suggest a transfer rule from a young agent to an old agent, and investigate a condition under which an equilibrium allocations are interim Pareto efficient subject to the self-enforcement constraint. The main finding is the characterization of the cut-off transfer level above (resp. below) which the allocation induced by the transfer rule is (resp. not) interim Pareto efficient. JEL classification number: D31, D51, D61, D91