A Simple Optimality-Based No-Bubble Theorem for Deterministic Sequential Economies


We establish a simple no-bubble theorem that applies to a wide range of deterministic sequential economies with infinitely lived agents. In particular, we show that asset bubbles never arise if at least one agent can reduce his asset holdings permanently from some period onward. Our no-bubble theorem is based on the optimal behavior of a single agent, requiring virtually no assumption beyond the strict monotonicity of preferences. The theorem is a substantial generalization of Kocherlakota's (1992, Journal of Economic Theory 57, 245-256) result on asset bubbles and short sales constraints.


Asset bubbles, No-bubble theorem, Sequential budget constraints, Binary relation


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