Produce or Speculate? Asset Bubbles, Occupational Choice and Efficiency

41 Pages Posted: 19 Oct 2010

See all articles by Pierre Cahuc

Pierre Cahuc

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE); Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA); University of Angers - French National Center for Scientific Research (CNRS); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Edouard Challe

Ecole Polytechnique

Multiple version iconThere are 3 versions of this paper

Date Written: October 2010

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: Rational bubbles, occupational choice, dynamic efficiency

JEL Classification: E22, E44, G21

Suggested Citation

Cahuc, Pierre and Challe, Edouard, Produce or Speculate? Asset Bubbles, Occupational Choice and Efficiency (October 2010). Banque de France Working Paper No. 298. Available at SSRN: https://ssrn.com/abstract=1693814 or http://dx.doi.org/10.2139/ssrn.1693814

Pierre Cahuc (Contact Author)

National Institute of Statistics and Economic Studies (INSEE) - National School for Statistical and Economic Administration (ENSAE) ( email )

92245 Malakoff Cedex
France

Université Paris I Panthéon-Sorbonne - Equipe Universitaire de Recherche en Economie Quantitative (EUREQUA) ( email )

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Paris Cedex 13, 75647
France
+33 1 4117 3717 (Phone)
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HOME PAGE: http://eurequa.univ-paris1.fr/membres/cahuc/

University of Angers - French National Center for Scientific Research (CNRS)

106-112 Boulevard de l'Hopital
75647 Paris Cedex 13
France
+33 4 44 07 82 06 (Phone)
+33 4 44 07 82 02 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Edouard Challe

Ecole Polytechnique ( email )

Ecole Polytechnique
Department of Economics
Paris, 75005
France

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