Introduction to Modern Economic Growth can reduce aggregate savings and thus ameliorate the overaccumulation problem The important role that unfunded Social Security (or national debt) plays in the overlapping generations model has made this model a workhorse for analysis of transfer programs, fiscal policies and generational accounting Our analysis of perpetual youth models, especially Yaari and Blanchard’s continuous time perpetual youth model, further clarified the roles of the path of labor income, finite horizons and arrival of new individuals in in generating the overaccumulation result In particular, this model shows that the declining path of labor income is important for the overaccumulation result (in the Samuelson-Diamond model there is an extreme form of this, since there is no labor income in the second period of the life of the individual) But perhaps the more important insight generated by these models is that what matters is not finite horizons per se, but the arrival of new individuals Overaccumulation and Pareto suboptimality arise because of the pecuniary externalities created on individuals that are not yet in the marketplace While overaccumulation and dynamic inefficiency have dominated much of the discussion of overlapping generations models in the literature, one should not overemphasize the importance of dynamic inefficiency As we discussed in Chapter 1, the major question of economic growth is why so many countries have so little capital for their workers and why the process of economic growth and capital accumulation started only over the past 200 years It is highly doubtful that overaccumulation is a major problem for most countries in the world The models presented in this chapter are very useful for another reason, however They significantly enrich our arsenal in the study of the mechanics of economic growth and capital accumulation All three of the major models presented in this chapter, the baseline overlapping generations model, the overlapping generations model with impure altruism, and the perpetual youth model, are tractable and useful vehicles for the study of economic growth in a variety of circumstances For example, the first two lead to equilibrium dynamics similar to the baseline Solow growth model, but without explicitly imposing an exogenously constant saving rate The latter model, on the other hand, allows an analysis of equilibrium dynamics similar to the basic neoclassical growth model, but also incorporates finite lives and 454