DP7602 Produce or Speculate? Asset Bubbles, Occupational Choice and Efficiency

Author(s): Pierre Cahuc, Edouard Challe
Publication Date: December 2009
Keyword(s): dynamic efficiency, occupational choice, Rational bubbles
JEL(s): E22, E44, G21
Programme Areas: Labour Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=7602

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