SFB 303 Discussion Paper No. A-425

Author: Lang, Günther
Title: Asset Bubbles, Pay-As-You-Go Systems and Dynamic Efficiency
Abstract: This paper deals with the role of bubbles, having the same meaning as Ponzi games, for implementing efficient growth paths in a closed economy overlapping generations model. It is shown that the well-known arbitrage condition for bubbles, namely that they must yield the same return in equilibrium as real assets, is generically neither necessary nor sufficient for a Pareto-improvement compared to a perfect-foresight equilibrium without bubbles. A consequence of this fact is that bubbles, or Ponzi games, are not Pareto-improving generically, and therfore, it can be irrational for agents to be on the demand side on the market for bubbles, although a bubbly equilibrium could exist.
Keywords: Bubbles, Dynamic Effiency, Ponzi Games, Pay-As-You-Go Systems
JEL-Classification-Number: D91, E13, G11, H55, H62, O12, O16, O41
Creation-Date: December 1993
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