Bubbles, Bluffs, and Greed

Harashima, Taiji (2015): Bubbles, Bluffs, and Greed.

Abstract

A rational bubble cannot theoretically exist if people have infinite horizons. This paper shows that a bubble-like phenomenon can be generated by a “bluff” even if people are rational and have infinite horizons. A bluff is defined as the behavior of an agent who pretends to possess private information to gain profits, particularly (false or misleading) information that the representative household’s rate of time preference (RTP RH) has changed. An alternative definition of the representative household indicates that households must ex ante generate an expected RTP RH to behave optimally, but the expected RTP RH has to be generated based on beliefs about the RTP RH. Bluffers exploit the opportunities derived from the fragile nature of the expected RTP RH. The driving force behind bluffs is greed because bluffers do not work hard to gain profits by producing and selling better goods and services more cheaply, but by disseminating contaminated information, or acting in such a way to mislead people into believing the expected RTP RH has changed.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bubble; Bluff; Greed; Time preference; The representative household; The financial supervision
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading

References

Antonelli, Giovanni Battista (1886) Sulla Teoria Matematica Della Economia Politica, Pisa, Tipografia del Falchetto.

Barsky, Robert B. and Eric R. Sims (2012) “Information, Animal Spirits, and the Meaning of Innovations in Consumer Confidence,” American Economic Review, Vol. 102, No. 4. pp. 1343-77.

Becker, Gary S. and Casey Mulligan (1997) “The Endogenous Determination of Time Preference,” Quarterly Journal of Economics, Vol. 112, No. 3, pp. 729–758.

Becker, Robert A. (1980) “On the Long-run Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households,” The Quarterly Journal of Economics, Vol. 95, No. 2, pp. 375–382.

Blanchard, Olivier J., and Mark W. Watson (1982) “Bubbles, Rational Expectations, and Financial Markets.” in Crises in the Economic and Financial Structure (Paul Wachtel ed.), Lexington Press, Lexington, Mass.

Böhm-Bawerk, Eugen von (1889) Capital and Interest, Reprinted by Libertarian Press, South Holland, IL, 1970.

Das, Mausumi. (2003) “Optimal Growth with Decreasing Marginal Impatience,” Journal of Economic Dynamics & Control, Vol. 27, No. 10, pp. 1881–1898.

Epstein, Larry G. and J. Allan Hynes (1983) “The Rate of Time Preference and Dynamic Economic Analysis,” Journal of Political Economy, Vol. 91, No. 4, pp. 611-635.

Fisher, Irving (1930) The Theory of Interest, Macmillan, New York

Frederick, Shane, George Loewenstein and Ted O’Donoghue (2002) “Time Discounting and Time Preference: A Critical Review,” Journal of Economic Literature, Vol. 40, No. 2, pp. 351-401.

Harashima, Taiji (2004) “A More Realistic Endogenous Time Preference Model and the Slump in Japan,” EconWPA Working Papers, ewp-mac0402015.

Harashima, Taiji (2010) “Sustainable Heterogeneity: Inequality, Growth, and Social Welfare in a Heterogeneous Population,” MPRA (The Munich Personal RePEc Archive) Paper, No. 24233.

Harashima, Taiji (2014a) “The Representative Household Assumption Requires Sustainable Heterogeneity in Dynamic Models,” MPRA (The Munich Personal RePEc Archive) Paper, No. 57520.

Harashima, Taiji (2014b) “Time Preference Shocks,” MPRA (The Munich Personal RePEc Archive) Paper, No. 60205.

Lawrance, Emily C. (1991) “Poverty and the Rate of Time Preference: Evidence from Panel Data,” Journal of Political Economy, Vol. 99, No. 1, pp. 54–77.

Lucas, Robert E., Jr. and Nancy L. Stokey (1984) “Optimal Growth with Many Consumers,” Journal of Economic Theory, Vol. 32, pp. 139-171.

Obstfeld, Maurice (1990) “Intertemporal Dependence, Impatience, and Dynamics,” Journal of Monetary Economics, Vol. 26, No. 1, pp. 45-75.

Samuelson, Paul (1937) “A Note on Measurement of Utility,” Review of Economic Studies, Vol. 4, No. 2, pp. 155–161.

Samwick, Andrew A. (1998) “Discount Rate Heterogeneity and Social Security Reform,” Journal of Development Economics, Vol. 57, No. 1, pp. 117–146.

Santos, Manuel S. and Michael Woodford (1997) “Rational Asset Pricing Bubbles,” Econometrica, Vol. 65, No. 1, pp. 19–57.

Uzawa, Hirofumi (1968) “Time Preference, the Consumption Function, and Optimal Asset Holdings,” in Value, Capital, and Growth: Papers in Honour of Sir John Hicks (J. N. Wolfe ed.), University of Edinburgh Press, Edinburgh, Scotland.

Ventura, Luigi (2003) “Direct Measure of Time-preference,” Economic and Social Review, Vol. 34, No. 3, pp. 293–310.