Working Paper: CEPR ID: DP7602
Authors: Pierre Cahuc; Edouard Challe
Abstract: We study the macroeconomic effects of rational asset bubbles in an overlapping-generations economy where asset trading requires specialized intermediaries and where agents freely choose between working in the production or in the financial sector. Frictions in the market for deposits create rents in the financial sector that affect workers' choice of occupation. When rents are large, the private gains associated with trading asset bubbles may lead too many workers to become speculators, thereby causing rational bubbles to lose their efficiency properties. Moreover, if speculation can be carried out by skilled labor only, then asset bubbles displace skilled workers away from the productive sector and raise income and consumption inequalities.
Keywords: Dynamic Efficiency; Occupational Choice; Rational Bubbles
JEL Codes: E22; E44; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Asset bubbles (G19) | Size of the financial sector (G29) |
| Size of the financial sector (G29) | Labor allocation (J29) |
| Labor allocation (J29) | Welfare (I38) |
| Asset bubbles (G19) | Labor allocation (J29) |
| Asset bubbles (G19) | Welfare (I38) |
| Rents in the financial sector (G19) | Labor allocation (J29) |
| Asset bubbles (G19) | Income inequality (D31) |
| Asset bubbles (G19) | Consumption inequality (D31) |
| Skilled labor attraction to financial sector (J24) | Reduction in skilled labor in productive sector (J24) |