To Bubble or Not to Bubble: Asset Price Dynamics and Optimality in OLG Economies

2025-08-05

AI Summary

This paper investigates asset price dynamics and equilibrium efficiency in an overlapping-generations (OLG) exchange economy with dividend-paying assets. Using dynamic general equilibrium modeling and steady-state analysis, it characterizes—within the exogenous parameter space—the existence conditions for three distinct equilibrium types: bubble-free, mixed-bubble, and full-bubble equilibria. It establishes the necessary and sufficient condition for bubble existence: a bubble arises if and only if the asset-free steady-state interest rate is below the population growth rate and the per-capita sum of dividends is finite. Furthermore, it uncovers an intrinsic link between asset price behavior and Pareto optimality: while bubble equilibria may improve intertemporal resource allocation, they typically induce dynamic inefficiency. The analysis provides a systematic classification of the equilibrium set in OLG models and delivers a unified theoretical framework for understanding the origins, identification, and welfare implications of asset bubbles.

Technology Category

• Game Theory and Economic Paradigms: Equilibrium
• Multiagent Systems: Mechanism Design
• Search and Optimization: Mixed Discrete/Continuous Search

Application Category

• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• Web Mining and Content Analysis: Models for Web evolution
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs

Abstract

We study an overlapping generations (OLG) exchange economy with an asset that yields dividends. First, we derive general conditions, based on exogenous parameters, that give rise to three distinct scenarios: (1) only bubbleless equilibria exist, (2) a bubbleless equilibrium coexists with a continuum of bubbly equilibria, and (3) all equilibria are bubbly. Under stationary endowments and standard assumptions, we provide a complete characterization of the equilibrium set and the associated asset price dynamics. In this setting, a bubbly equilibrium exists if and only if the interest rate in the economy without the asset is strictly lower than the population growth rate and the sum of per capita dividends is finite. Second, we establish necessary and sufficient conditions for Pareto optimality. Finally, we investigate the relationship between asset price behaviors and the optimality of equilibria.

Problem

• Conditions for bubble existence in OLG economies
• Characterization of equilibrium set and price dynamics
• Relationship between asset prices and Pareto optimality

Innovation

• Derives conditions for bubble equilibria scenarios
• Characterizes equilibrium set with stationary endowments
• Links asset price behaviors to Pareto optimality