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Rational bubbles and middlemen

Author

Listed:
  • Awaya, Yu

    (Department of Economics, University of Rochester)

  • Iwasaki, Kohei

    (Institute of Social and Economic Research, Osaka University)

  • Watanabe, Makoto

    (School of Business and Economics, Vrije Universiteit Amsterdam)

Abstract

This paper develops a model of rational bubbles where trade of an asset takes place through a chain of middlemen. We show that there exists a unique and robust equilibrium, and a bubble can occur due to information frictions in bilateral and decentralized markets. 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, but any announcement from the central bank has no effect on welfare with risk neutral agents. Middlemen are the source of financial fragility.

Suggested Citation

  • Awaya, Yu & Iwasaki, Kohei & Watanabe, Makoto, 2022. "Rational bubbles and middlemen," Theoretical Economics, Econometric Society, vol. 17(4), November.
    • Handle: RePEc:the:publsh:4975
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    References listed on IDEAS

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    Cited by:

    1. Liu, Tie-Ying & Lin, Ye, 2024. "Who has mastered exchange rate ups and downs: China or the United States?," The North American Journal of Economics and Finance, Elsevier, vol. 70(C).
    2. Ludovic Tangpi & Shichun Wang, 2024. "Optimal bubble riding with price-dependent entry: a mean field game of controls with common noise," Mathematics and Financial Economics, Springer, volume 18, number 5, October.
    3. Janet Hua Jiang & Peter Norman & Daniela Puzzello & Bruno Sultanum & Randall Wright, 2024. "Is Money Essential? An Experimental Approach," Journal of Political Economy, University of Chicago Press, vol. 132(9), pages 2972-2998.
    4. Awaya, Yu & Krishna, Vijay, 2024. "Panics and prices," Journal of Economic Theory, Elsevier, vol. 217(C).
    5. Ludovic Tangpi & Shichun Wang, 2023. "Optimal Bubble Riding with Price-dependent Entry: a Mean Field Game of Controls with Common Noise," Papers 2307.11340, arXiv.org.
    6. Yu Awaya & Kohei Iwasaki & Makoto Watanabe, 2024. "Money Is the Root of Asset Bubbles," CESifo Working Paper Series 10923, CESifo.

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    More about this item

    Keywords

    Rational bubbles; Middlemen; Higher-order uncertainty; Asymmetric information; Flippers;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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