Economics Dictionary of Arguments

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Mause I 278
Growth/Generational Justice/Diamond: in a growing economy, the problem of so-called dynamic inefficiency can arise:
In an overlapping generation growth model, in which there is at all times an active generation, earning income from work and saving for old age, and a second generation, retired and dissolving savings, dynamic inefficiency exists when the marginal productivity of capital is lower than the growth rate of the population. (1) Then too much is saved overall and the capital stock per person is too large.
Problem: dynamic inefficiency is accompanied by an unnecessarily high reduction in consumption.
Solution: one could build an efficient pyramid system ("Ponzi scheme", snowball system) that works as long as the next generation is bigger.
Snowball System: Such an efficient pyramid scheme is in principle also conceivable in a model with investments in human capital instead of population growth. (2)
AbelVsDynamic Inefficiency/AbelVsDiamond: the dynamic inefficiency has been empirically questioned by Abel. (3) See also Generational Justice/Weizsäcker.

1. Peter A. Diamond, 1965. National debt in a neoclassical growth model. American Economic Review 55 (5): 1126– 1150.
2. Berthold U. Wigger. 2005. Public debt, human capital formation, and dynamic inefficiency. International Tax and Public Finance 12( 1): 47– 59.
3. Andrew B. Abel, N. Gregory Mankiw, Lawrence H. Summers, und Richard J. Zeckhauser. 1989. Assessing dynamic efficiency: Theory and evidence. Review of Economic Studies 56( 1): 1– 20.

Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution.
The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.

EconDiam I
Peter A. Diamond
National debt in a neoclassical growth mode 1965

Mause I
Karsten Mause
Christian Müller
Klaus Schubert,
Politik und Wirtschaft: Ein integratives Kompendium Wiesbaden 2018

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