Rational Bubbles and Middlemen

36 Pages Posted: 28 May 2019

See all articles by Yu Awaya

Yu Awaya

University of Rochester

Kohei Iwasaki

University of Wisconsin - Madison

Makoto Watanabe

Vrije Universiteit Amsterdam, School of Business and Economics

Date Written: April 30, 2019

Abstract

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

Suggested Citation

Awaya, Yu and Iwasaki, Kohei and Watanabe, Makoto, Rational Bubbles and Middlemen (April 30, 2019). Available at SSRN: https://ssrn.com/abstract=3380383 or http://dx.doi.org/10.2139/ssrn.3380383

Yu Awaya (Contact Author)

University of Rochester ( email )

280 Hutchison Road
Rochester, NY 14627
United States

Kohei Iwasaki

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Makoto Watanabe

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

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