Growth effect of bubbles in a non-scale endogenous growth model with in-house R&D

This paper provides a theoretical explanation for why the presence of asset bubbles can lead to higher economic growth in concurrence with high consumption by using a simple endogenous growth model. In the model economy, long-lived valuemaximizing firms continuously improve the quality of their specific products through in-house R&D, while at the same time new firms also enter into the market. Due to an absence of intergenerational altruism, asset bubbles can exist as pyramid schemes whose value is not backed by fundamental value. The presence of asset bubbles then leads to higher interest rates. This requires product proliferation to be impeded, which would result in an increase in the demand for differentiated goods at the level of an individual firm. A larger scale of production at the level of an individual firm can encourage in-house R&D of firms and promote economic growth.