Existence and stability of overconsumption equilibria

Growth models with endogenous mortality assume generally that life expectancy is increasing with output per capita and, thus, with individual consumption, whatever its level is. However, empirical evidence supports a U-shaped relationship between consumption and mortality, implying that the monotonicity of that relation is local but not global. This paper develops a two-period OLG model where life expectancy is a non-monotone function of consumption, and where agents form myopic anticipations about life expectancy. The existence, uniqueness and stability of steady-state equilibria are studied. It is shown that overconsumption equilibria - i.e. equilibria at which consumption exceeds the level maximizing life expectancy - exist in highly productive economies with a low impatience. We identify also conditions under which there exist long-run cycles in output and longevity around overconsumption equilibria.

Research Highlights► The relation between life expectancy and consumption is non-monotone. ► We study the dynamics of an OLG economy with a non-monotone survival function. ► Overconsumption equilibria exist in highly productive economies with a low impatience. ► Overconsumption is the outcome of patience rather than impatience. ► Long-run economic and demographic cycles can exist around overconsumption equilibria.