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Intangible Capital, Relative Asset Shortages and Bubbles

  • Stefano Giglio
  • Tiago Severo

Purely technological factors can be a fundamental force behind the emergence of asset price bubbles in developed economies. We analyze an economy in which the production technology utilizes both physical and intangible capital, where the latter cannot be used as collateral for borrowing. Technological change, in the form of increased importance of intangible capital in production, sharpens the borrowing constraints of entrepreneurs, leading to a scarcity of high-yield assets relative to low-yield ones. This can create the conditions for asset bubbles. Additionally, due to the financial frictions, standard dynamic efficiency tests are not valid, and bubbles are not Pareto improving.

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Date of creation: 22 May 2011
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Handle: RePEc:cla:levarc:786969000000000121
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