Dynamic Efficiency in a Generalized Diamond-Type Overlapping Generations Model

Considerations on dynamic efficiency began with the seminal papers by Maurice Allais (1947) and Paul Samuelson (1958) which may well be among the most stimulating contributions to economics. They stress that the competitive equilibrium allocation is not necessarily Pareto-optimal, although the usual kinds of distortions are absent. In this sense, their results rocked the foundations of modern welfare economics, which are deeply connected with modern equilibrium theory: for the traditional general equilibrium model, developed by Arrow and Debreu (1954) and some others, it was shown by Koopmans (1957) that a Walrasian equilibrium possesses the property of Pareto-optimality — and just this property was now questioned by Allais’ and Samuelson’s findings.