Beauty Contests and Irrational Exuberance: A Neoclassical Approach

George-Marios Angeletos, Guido Lorenzoni () and Alessandro Pavan

No 15883, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The arrival of new, unfamiliar, investment opportunities is often associated with "exuberant" movements in asset prices and real economic activity. During these episodes of high uncertainty, financial markets look at the real sector for signals about the profitability of the new investment opportunities, and vice versa. In this paper, we study how such information spillovers impact the incentives that agents face when making their real economic decisions. On the positive front, we find that the sensitivity of equilibrium outcomes to noise and to higher-order uncertainty is amplified, exacerbating the disconnect from fundamentals. On the normative front, we find that these effects are symptoms of constrained inefficiency; we then investigate policies that can improve welfare in our model without any informational advantage on the government's part. At the heart of these results is a distortion that induces a conventional neoclassical economy to behave as a Keynesian "beauty contest" and to exhibit fluctuations that may look like "irrational exuberance" to an outside observer.

JEL-codes: D82 E20 E44 G10 G14 (search for similar items in EconPapers)
Date: 2010-04
Note: AP EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (42)

Downloads: (external link)
http://www.nber.org/papers/w15883.pdf (application/pdf)

Related works:
Working Paper: Beauty Contests and Irrational Exuberance: A Neoclassical Approach (2010)
Working Paper: Beauty Contests and "Irrational Exuberance": A Neoclassical Approach (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:15883

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w15883

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().