Rational Bubbles and Middlemen
36 Pages Posted: 28 May 2019
Date Written: April 30, 2019
This paper develops a ﬁnite-period model of rational bubbles where trade of an asset takes place through a chain of middlemen. We show that there exists a unique equilibrium, and a bubble can occur due to higher-order uncertainty. Under reasonable assumptions, the equilibrium price is increasing and accelerating during bubbles although the fundamental value is constant over time. Bubbles may be detrimental to the economy; however, bubble-bursting policies aﬀect agents’ beliefs and it turns out that they have no eﬀect on welfare. We also demonstrate that the possibility that middlemen obtain more information leads to larger bubbles.
Keywords: Rational bubbles; Middlemen; Higher-order uncertainty; Asymmetric information; Flippers
JEL Classification: D82, D83, D84, G12, G14
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