To Bubble or Not to Bubble: Asset Price Dynamics and Optimality in OLG Economies

Stefano Bosi (), Cuong Le Van () and Ngoc-Sang Pham ()
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Stefano Bosi: UEVE - Université d'Évry-Val-d'Essonne
Cuong Le Van: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris
Ngoc-Sang Pham: EM Normandie - École de Management de Normandie = EM Normandie Business School

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: We study an overlapping generations (OLG) exchange economy with an asset that yields dividends. First, we derive general conditions, based on exogenous parameters, that give rise to three distinct scenarios: (1) only bubbleless equilibria exist, (2) a bubbleless equilibrium coexists with a continuum of bubbly equilibria, and (3) all equilibria are bubbly. Under stationary endowments and standard assumptions, we provide a complete characterization of the equilibrium set and the associated asset price dynamics. In this setting, a bubbly equilibrium exists if and only if the interest rate in the economy without the asset is strictly lower than the population growth rate and the sum of per capita dividends is finite. Second, we establish necessary and sufficient conditions for Pareto optimality. Finally, we investigate the relationship between asset price behaviors and the optimality of equilibria.

Keywords: Pareto optimal; low interest rate; fundamental value; asset price bubble; overlapping generations; exchange economy (search for similar items in EconPapers)
Date: 2025-08-04
New Economics Papers: this item is included in nep-dge
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