Asset Bubbles, Pay as You Go Systems and Dynamic Efficiency

This paper deals with the role of bubbles, having the same meaning as Ponzi games, for implementing efficient growth paths in a closed economy overlapping generations model. It is shown that the well-known arbitrage condition for bubbles, namely that they must yield the same return in equilibrium as real assets, is generically neither necessary nor sufficient for a Pareto-improvement compared to a perfect-foresight equilibrium without bubbles. A consequence of this fact is that bubbles, or Ponzi games, are not Pareto-improving generically, and therefore, it can be irrational for agents to be on the demand side on the market for bubbles, although a bubbly equilibrium could exist.N/