PRODUCE OR SPECULATE? ASSET BUBBLES, OCCUPATIONAL CHOICE, AND EFFICIENCY

Authors

  • Pierre Cahuc,

    1. Ecole Polytechnique and CREST, France, IZA, Germany, and CEPR, UK; Ecole Polytechnique, CREST, and Banque de France, France
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  • Edouard Challe

    1. Ecole Polytechnique and CREST, France, IZA, Germany, and CEPR, UK; Ecole Polytechnique, CREST, and Banque de France, France
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    • We are grateful to two anonymous referees as well as to Gadi Barlevy, Sanjay Chugh, Dean Corbae, Guy Laroque, Jacques Olivier, Xavier Ragot, Ariel Reshef, Guillaume Rocheteau, and Jaume Ventura for their comments and suggestions. We also received helpful feedback from seminar participants at CREST-INSEE, Ecole Polytechnique, University of Cambridge, University of Cergy, Banque de France, and Institut Poincaré as well as from conference participants at the 2011 Annual Meeting of the American Economic Association, the 2010 Philadelphia Fed “Labor Markets after the Great Recession” Conference, the 2010 Econometric Society World Congress, the 2010 Midwest Macro Meetings, the 2010 Paris Summer Macro-Finance Workshop, and the 2009 CEPN/LAGA “Défis actuels de la finance” Conference. All remaining errors are ours. Please address correspondence to: Edouard Challe, Ecole Polytechnique, Economics Department, Route de Saclay, 91128 Palaiseau, France. Phone: +33 1 69 33 30 11. Fax: +33 1 69 33 34 27. E-mail: edouard.challe@polytechnique.edu


  • Manuscript received September 2010; revised June 2011.

Abstract

We study the effects of rational asset bubbles in an overlapping-generations economy where asset trading requires specialized intermediaries and agents freely choose between working in the production or the financial sector. Frictions in the market for deposits create rents in the financial sector that affect agents’ occupational choices. When rents are large, the private gains associated with trading bubbles lead too many agents to become speculators, causing bubbles to lose their efficiency properties. Moreover, if speculation can be carried out by skilled labor only, then bubbles displace skilled workers away from the productive sector and raise income inequalities.

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