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Asset Bubbles and Bailouts

  • Tomohiro Hirano

    (University of Tokyo)

  • Masaru Inaba

    (Kansai University/The Canon Institute for Global Studies)

  • Noriyuki Yanagawa

    (University of Tokyo)

This paper investigates the relationship between bubbles and government bailouts. It shows that bailouts for bursting bubbles may positively influence ex-ante production efficiency and relax the existence condition of stochastic bubbles. The level of bailouts has a non-monotonic relationship with production efficiency and not full bailouts but a "partial bailout" policy realizes production efficiency. Moreover, it examines the welfare effects of bailout policies rigorously. The welfare of rescued entrepreneurs is an increasing function of bailout level, but the welfare of taxpayers (workers) shows a non-monotonic relation with bailout level. It shows that even non-risky bubbles may be undesirable for taxpayers.

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Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-268.

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Length: 75 pages
Date of creation: Jan 2012
Date of revision:
Handle: RePEc:cfi:fseres:cf268
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