||Asset Bubbles and Bailouts
Hirano, Tomohiro ,
Inaba, MasaruYanagawa, Noriyuki
2015-05 , Institute of Economic Research, Hitotsubashi University
First Version: April 2011, This Version: March 2015
This paper investigates the relationship between bubbles and governmentbailouts. As long as bubble size is relatively small, bubbles increase production level, but once the size becomes too large, then bubbles reduce it. Given this non-monotonic relationship, we show 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 a "partial bailout" policy achieves production efficiency. Moreover, it examines the welfare effects of bailout policies rigorously and shows that even non-risky bubbles may be undesirable for taxpayers.
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