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Bubbles and Bluffs: Risk Lovers Can Survive Economically

Harashima, Taiji (2018): Bubbles and Bluffs: Risk Lovers Can Survive Economically.

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Abstract

In economics, risk lovers have been generally ignored, most likely because it has generally been thought that they cannot survive economically. In this paper, I examine the possibility that risk lovers can exist continuously in the framework of an economic growth model. A bubble-like phenomenon (a so-called “bubble economy”) can be generated if risk lovers undertake a very risky financial “bluff”—for example, if they purposely raise some important asset prices. I conclude that because risk-loving and risk-averse households can coexist at a state of sustainable heterogeneity, risk lovers can exist continuously in an economy. Therefore, it is likely that a bluff will be undertaken by risk lovers and a bubble-like phenomenon can be generated.

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