RIEB, Kobe University

A Simple No-Bubble Theorem for Deterministic Dynamic Economies

In this paper we show a simple no-bubble theorem that applies to a wide range of deterministic economies with innitely lived agents. In particular, we show that asset bubbles are impossible if there is at least one agent who can reduce his asset holdings permanently from some period onward. This is a substantial generalization of Kocherlakota's (1992, Journal of Economic Theory 57, 245-256 result on asset bubbles and short sales constraints; our result requires virtually no assumption except for the strict monotonicity of preferences. We also provide a substantial generalization of his result on asset bubbles and the present value of a single agent's endowment. As a consequence of these results, we extend Huang and Werner's (2000, Economic Theory 15, 253-278 no-bubble theorem to an economy with multiple assets.