Rational Bubbles on Dividend-Paying Assets: A Comment on Tirole (1985)

Ngoc-Sang Pham and Alexis Akira Toda

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Abstract: Tirole (1985) studied an overlapping generations model with capital accumulation and showed that the emergence of asset bubbles solves the capital over-accumulation problem. His Proposition 1(c) claims that if the dividend growth rate is above the bubbleless interest rate (the steady-state interest rate in the Diamond economy without bubbles) but below the population growth rate, then bubbles are necessary in the sense that there exists no bubbleless equilibrium but there exists a unique bubbly equilibrium. We provide a counterexample to this claim based on an analytical example but prove the claim under the additional assumptions that initial capital is sufficiently large and dividends are sufficiently small.

Date: 2025-07
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