Solving dynamic inefficiency with politically sustainable guest worker programs

•Dynamic inefficiency in OLG models can be solved with guest worker policies. •Young agents politically choose their most preferred guest worker quota. •Model is solved under Markov strategies and under trigger strategies. •Models admit analytic solutions. •Welfare of all generations is higher with guest workers.

An overlapping generations economy that is dynamically inefficient can solve the inefficiency by allowing foreign guest workers every period in order to decrease capital per worker. These policies increase the welfare of all generations and can be politically supported by a young majority under Markov and under trigger strategies that “reward” or “punish” the behavior of previous generations.