Negative bubbles and the market for “dreams”: “Lemons” in the looking glass

Douglas R. Emery

Journal of Financial Research, 2022, vol. 45, issue 1, 5-16

Abstract: I extend Akerlof's adverse selection model, where uninformed participants withdraw from the market, and show that rather than collapse, “lemons” can, and often do, lead to a negative bubble. I then show that a mirror image of his model, where uninformed participants pursue “dreams” of becoming wealthy (e.g., trading in cryptocurrencies), can lead to a positive bubble that ultimately causes informed experts to withdraw when the supply of assets is finite. I also argue that, because prices of antiques, collectibles, and other objets d'art are typically based primarily on sentiment, fad, and/or fashion, such assets trade persistently in a positive bubble.

Date: 2022
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