This paper analyzes the possibility and the consequences of asset price overvaluation in a dynamic economy where financially constrained firms demand and supply liquidity. Bubbles are more likely to emerge, the scarcer the supply of outside liquidity and the more limited the pledgeability of corporate income; they crowd investment in (out) when liquidity is abundant (scarce). We analyze the economic implications of firm heterogeneity, endogenous corporate governance, and stochastic bubbles. Finally we draw some implications for the way public policy could react to bubbles.
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|Date of creation:||Oct 2009|
|Date of revision:||Feb 2011|
|Publication status:||Published in The Review of Economic Studies, vol. 79, n°2, 2012, p. 678-706.|
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