Rational bubbles and the spirit of capitalism

Ge Zhou

MPRA Paper from University Library of Munich, Germany

Abstract: This paper explores the existence of rational bubbles in the pricing of an asset that pays no dividend. I find that when "the spirit of capitalism" is introduced into a growth model, rational bubbles do exist provided that the marginal benefit from holding wealth is nontrivial relative to the marginal utility of consumption as time goes to infinity. I use phase diagrams to discuss the property of the bubbly equilibrium and I use two examples to describe the bubbly equilibrium trajectory explicitly and more intuitively. Moreover, I show that a stochastic bubble, which bursts with an exogenous probability, could exist. This could provide a simple theoretical foundation to explore economic implications of the collapse of bubbles.

Keywords: bubbles; the spirit of capitalism; growth (search for similar items in EconPapers)
JEL-codes: E2 E44 (search for similar items in EconPapers)
Date: 2011-06
New Economics Papers: this item is included in nep-hpe
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Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/44719/8/MPRA_paper_44719.pdf revised version (application/pdf)

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