JOURNAL OF ECONOMIC THEORY 23, 28 l-306 (1980) The Overlapping-Generations Model, I: The Case of Pure Exchange without Money* YVES BALASKO+*AND KARL SHELLS t Universik Paris I and CEPREMAP. Paris, France * CARESS, Philadelphia, Pennsylvania 19104 Received October 4, 1979; revised January 2. 1980 1. INTRODUCTION The overlapping-generations model’ was introduced by Samuelson [ 171 in 1958. Samuelson’s seminal paper has several important themes. He provides examples with nicely behaved agents, complete and costless markets, full information, and no externalities, in which Walrasian equilibria are not Pareto-optimal. This failure of the First Theorem of Welfare Economics was clarified in Shell [ 191. It is shown that the “double infinity” (of consumers and commodities)-in particular, the assumption of an unbounded time horizon along with (dated) commodities for each period-suffices to render the First Theorem inapplicable to the general overlapping-generations model. A second theme in [ 171 is that the limited opportunities for intertemporal exchange are a possible cause of inoptimality. Cass and Yaari [8] study this aspect, stressing that this source of inoptimality is not exclusive to dynamic models. A third theme of the Samuelson article is that paper assets (e.g., money) created in consequence of the government’s deficit can cure--or, at least, reduce-inoptimality. This theme has been explored in several articles, including 16, 19, 21, 221. The tools of this research have been picked up by macroeconomic theorists and used to address the more traditional questions about government policy. Since the overlapping-generations model is the * This research was supported by Grant SOC 78-06157 from the National Science Foun- dation to the Center for Analytic Research in Economics and the Social Sciences at the University of Pennsylvania. ’ Following Samuelson, the overlapping-generations model is often loosely referred to as the consumption-loans model. We eschew this usage, since it replaces the structural description with a description in terms of an attribute of some of the models. In particular, the latter description might incorrectly suggest that inefficiency in this class of models results only from imperfections in the borrowing and lending markets. 281 0022-053 l/80/06028 l-26$02.00/0 Copyright C 1980 by Academic Press. Inc. All rights of reproduction in any form reserved.