Efficient Bubbles?

64 Pages Posted: 6 Jun 2018

See all articles by Valentin Haddad

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Paul Ho

Federal Reserve Banks - Federal Reserve Bank of Richmond

Erik Loualiche

University of Minnesota, Finance

Date Written: June 5, 2018

Abstract

Episodes of booming firm creation often coincide with intense speculation on financial markets. Disagreement among investors transforms the economics of optimal firm creation. We characterize the interaction between speculation and classic entry externalities from growth theory through a general entry tax formula for a non-paternalistic planner. The business-stealing effect is mitigated when investors believe they can identify the best firms. Speculation thus increases firm entry but reduces the optimal tax, potentially resulting in under-entry. The appropriability effect also vanishes, leaving only general equilibrium effects on input prices, aggregate demand, or knowledge. As a result, speculation reverses the role of many industry characteristics for efficiency. For instance, as the labor share increases, the optimal tax decreases under agreement but increases under disagreement. Further, economies with identical aggregate properties but a different market structure have the same efficiency with agreement, but call for different policies once financial market speculation is taken into account.

Keywords: Innovation, Growth, Entrepreneurship, Bubbles, Industrial Policy, Optimal Taxation

Suggested Citation

Haddad, Valentin and Ho, Paul and Loualiche, Erik, Efficient Bubbles? (June 5, 2018). Paris December 2018 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=3191459 or http://dx.doi.org/10.2139/ssrn.3191459

Valentin Haddad

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paul Ho

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Erik Loualiche (Contact Author)

University of Minnesota, Finance ( email )

110 Wulling Hall, 86 Pleasant St, S.E.
308 Harvard Street SE
Minneapolis, MN 55455
United States
612 625 5679 (Phone)

HOME PAGE: http://https://loualiche.gitlab.io/www/

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