CAPITAL GAINS: BLUE MACHINES AND RED MACHINES

Luís Aguiar-Conraria () and Karl Shell ()

The Singapore Economic Review (SER), 2005, vol. 50, issue spec0, 437-447

Abstract: Capital gains play an essential role in the intertemporal allocation of resources, but they can also fuel self-fulfilling bubbles. The simple case of 2 "identical" capitals is analyzed in an overlapping generations model. The only trajectory in which expectations are realized at every date is the one in which blue machines and red machines have the same price. If ever their prices differ, then there is a "bubble" which must burst in finite time.

Keywords: Bubbles; capital gains; heterogeneous capital; irreversible investment; overlapping generations (OG); Tobin'sq (search for similar items in EconPapers)
Date: 2005
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Working Paper: Capital Gains: Blue Machines and Red Machines (2005)
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DOI: 10.1142/S021759080500213X

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