On Equilibrium for Overlapping Generations Organizations

A necessary feature for equilibrium is that beliefs about the behavior of other agents are rational and individuals maximize. 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. *Ríos-Rull thanks the National Science Foundation for Grant SBR-9309514 and the University of Pennsylvania Research Foundation for their support. Prescott thanks the National Science Foundation for grant SBR-9996201. We thank Julio Davila, Igor Livshits, Larry Jones, Dan Silverman, and attendants at seminars in the Penn macro lunch group, Federal Reserve Bank of Minneapolis, Cornell-Penn State University Macro-Theory Conference, the University of Rochester, UCLA, and the 1999 Midwest Theory Meetings for comments. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.