Choosing longevity with overlapping generations

Abstract

We extend Diamond’s (1965) OLG model to allow agents to choose whether toparticipate in the second period of life. The valuation of early exit (x) is a keyparameter. We characterize competitive equilibria, efficient allocations, andpredictions for income and life expectancy over time. We find that, with logarithmicutility, for any value of x, there is a range of initial values of the capital stock forwhich some agents would prefer to exit in equilibrium. The shape of the transitionfunction and the number of steady state equilibria depend crucially on the value ofcapital’s share of income.