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Asset Bubbles and Bailouts

Tomohiro Hirano (), Masaru Inaba and Noriyuki Yanagawa

No 14-001E, CIGS Working Paper Series from The Canon Institute for Global Studies

Abstract: This paper investigates the relationship between bubbles and government bailouts. Contrary to the previous literature about bailouts, it shows that bailouts for bursting bubbles may positively influence ex-ante production efficiency and relax the existence condition of stochastic bubbles. The level of bailouts has a non-monotonic relationship with production efficiency and not full bailouts but a "partial bailout" policy achieves production efficiency. Moreover, it examines the welfare effects of bailout policies rigorously. The welfare of rescued entrepreneurs is an increasing function of bailout level, but the welfare of taxpayers (workers) shows a non-monotonic relation with bailout level. It shows that even non-risky bubbles may be undesirable for taxpayers.

Pages: 47
Date: 2014-01
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