Inequality and Risky Asset Bubbles

Abstract

We provide a simple rational bubble model demonstrating that a concentration of income is necessary and sufficient for the existence of equilibria with risky speculative bubbles. Income concentration among top earners leads to excess savings and depressed interest rates, which facilitate the emergence of risky bubbles and increase their equilibrium size. In this context, policies such as progressive taxation can have a macroprudential effect of reducing the existence region, riskiness and size of bubbles.

Keywords: income inequality, rational bubble

JEL Classification: E20, E30