Intangible Capital, Relative Asset Shortages and Bubbles

35 Pages Posted: 9 Apr 2011

See all articles by Stefano Giglio

Stefano Giglio

Yale School of Management; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Tiago Severo

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: March 6, 2011

Abstract

We analyze an OLG economy with financial frictions and accumulation of both physical and intangible capital. The key difference between these two types of capital is that intangible capital cannot be used as collateral for borrowing. As intangibles become more important relative to physical capital in production, interest rates decline, creating the conditions for the emergence of rational bubbles in equilibrium. The model predicts that the dynamics of capital accumulation in developed economies together with the low pledgeability of intangible capital induces an abundance of low-yield assets and a scarcity of high-yield ones. In our view, this is an important mechanism behind the long-lasting sequence of asset price bubbles observed in the last decades. Our paper stresses this relative imbalance and links it to purely technological factors. We also analyze the question of dynamic efficiency, demonstrating that, in the presence of financial frictions, neither the interest rate test nor the test proposed by Abel et al. (1989) are appropriate. Finally we show that, in general, rational bubbles are not Pareto improving in our framework.

Keywords: Intangible Capital, Asset Shortages, Rational Bubbles, Financial Constraints, Technological Change, Dynamic Inefficiency

JEL Classification: E22, E44, O16, O33, O40

Suggested Citation

Giglio, Stefano and Severo, Tiago, Intangible Capital, Relative Asset Shortages and Bubbles (March 6, 2011). Available at SSRN: https://ssrn.com/abstract=1804526 or http://dx.doi.org/10.2139/ssrn.1804526

Stefano Giglio (Contact Author)

Yale School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tiago Severo

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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