Optimal Population Growth in the Diamond OLG Model

This paper studies the effects of population growth on welfare in an OLG model, in which lower population growth raises output per worker but also reduces the ratio of workers to retirees. Under fairly mild restrictions on the model’s parameters, there exists an optimal population-growth rate—one that maximizes steady-state welfare. This growth rate may well be negative: it may be optimal for the population to shrink over time. The introduction of a pay-as-you-go social security system reduces the optimal population-growth rate.