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Informational Constraints and the Overlapping Generations Model: Folk and Anti-Folk Theorems

V. Bhaskar
The Review of Economic Studies
Vol. 65, No. 1 (Jan., 1998), pp. 135-149
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2567006
Page Count: 15
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Informational Constraints and the Overlapping Generations Model: Folk and Anti-Folk Theorems
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Abstract

This paper analyses the sustainability of inter-generational transfers in Samuelson's consumption-loan model when agents are imperfectly informed about past events. We find that with mild informational constraints, transfers cannot be supported by pure-strategy equilibria. Mixed strategies allow transfers to be sustained even if agents have little information, so that a version of the Folk theorem holds. However, these equilibria are not robust. If each agent's utility function is subjected to a small random perturbation as in Harsanyi (1973), these mixed strategy equilibria unravel, and only the zero-transfer allocation survives as the unique rationalizable outcome. This result is an example of mixed strategy equilibrium of an extensive form game which cannot be purified.

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