Econometrica: Nov 1985, Volume 53, Issue 6

Asset Bubbles and Overlapping Generations<1499:ABAOG>2.0.CO;2-N
p. 1499-1528

Jean Tirole

The first part of this paper considers the interaction between productive and nonproductive savings in a growing economy. It employs an overlapping generations model with capital accumulation and various types of rents, and gives necessary and efficient conditions for the existence of an aggregate bubble. The second part is a series of thoughts on the definition, nature, and consequences of asset bubbles. First, it derives some implications of bubbles for tests of asset pricing. Second, it demonstrates the specificity of money as an asset and shows that there is a fundamental dichtotomy in its formalization. Third, it discusses inefficiencies of price bubbles. Fourth, it shows that the financial definition of a bubble is not satisfactory for some assets.

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