Produce or Speculate? Asset Bubbles, Occupational Choice, and Efficiency

Posted: 11 Oct 2012

See all articles by Pierre Cahuc

Pierre Cahuc

Ecole Polytechnique, Paris

Edouard Challe

Ecole Polytechnique

Date Written: November 2012

Abstract

We study the effects of rational asset bubbles in an overlapping‐generations economy where asset trading requires specialized intermediaries and agents freely choose between working in the production or the financial sector. Frictions in the market for deposits create rents in the financial sector that affect agents’ occupational choices. When rents are large, the private gains associated with trading bubbles lead too many agents to become speculators, causing bubbles to lose their efficiency properties. Moreover, if speculation can be carried out by skilled labor only, then bubbles displace skilled workers away from the productive sector and raise income inequalities.

Suggested Citation

Cahuc, Pierre and Challe, Edouard, Produce or Speculate? Asset Bubbles, Occupational Choice, and Efficiency (November 2012). International Economic Review, Vol. 53, Issue 4, pp. 1105-1131, 2012, Available at SSRN: https://ssrn.com/abstract=2160159 or http://dx.doi.org/10.1111/j.1468-2354.2012.00713.x

Pierre Cahuc (Contact Author)

Ecole Polytechnique, Paris ( email )

1 rue Descartes
Paris, 75005
France

Edouard Challe

Ecole Polytechnique ( email )

Ecole Polytechnique
Department of Economics
Paris, 75005
France

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