Finite bubbles with short sale constraints and asymmetric information

Franklin Allen, Stephen E. Morris, Andrew Postlewaite

Research output: Contribution to journalArticle

138 Scopus citations

Abstract

We present a finite period general equilibrium model of an exchange economy with asymmetric information. We say that a rational expectations equilibrium exhibits a strong bubble if the price is higher than the dividend with probability one. We show that necessary conditions for a strong bubble to occur are that (1) each agent must have private information in the period and state in which the bubble occurs, (2) each agent must be short sale constrained at some period in the future with positive probability, and (3) agents’ trades are not common knowledge. We present examples of bubbles when the necessary conditions are satisfied. Journal of Economic Literature Classification Numbers: C72, D52, D82, D84, G12, G14.

Original languageEnglish (US)
Pages (from-to)206-229
Number of pages24
JournalJournal of Economic Theory
Volume61
Issue number2
DOIs
StatePublished - Jan 1 1993
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

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