ACTIVE INTERMEDIATION IN OVERLAPPING GENERATIONS ECONOMIES WITH PRODUCTION AND UNSECURED DEBT

It is well known that the first welfare theorem can fail for overlappi ng generations economies with private production and unsecured debt. T his paper demonstrates that the reason for this failure is that interm ediation is modeled as a purely passive coordination activity implemen ted by a Walrasian Auctioneer. When intermediation is modeled instead as a contestable activity carried out by a corporate intermediary owne d by consumer-shareholders and operated in their interest, every equil ibrium is Pareto efficient. In broader terms, these findings caution t hat the inefficiency observed in standard modelings of overlapping gen erations economies may not be the reflection of an intrinsic market fa ilure. Rather, the observed inefficiency could instead be due to a fun damental incompleteness in the model specification-the presumed inabil ity of private agents to exploit the earnings opportunities associated with incurring and forever rolling over debt.