We show how product variety affects asset prices in a general-equilibrium model. We analytically characterize the unique equilibrium and estimate the model to match asset pricing and product market moments. The equity premium and risk-free rate can be reconciled for risk aversion levels around 4...

I propose an arbitrage-based theory of bubbles in economies with general portfolio constraints and differences in beliefs. I find that, in general, bubbles cannot exist unless the constraints restrict the demand for credit sufficiently to induce low interest rates. Speculation due to...

Limited enforcement of debt contracts and mild penalties for default can lead to low equilibrium interest rates, to ensure debt repayment. Low interest rates, in turn, create conditions for bubbles. I show that bubbles in unsecured private debt exist when the punishment for default is a...

A nonstationary dividend yield, having a unit root, is seen as proof of bubbles (Craine 1993). This inference is not valid. A sufficient condition for the absence, respectively presence of bubbles is the uniform divergence, respectively uniform convergence of the dividend yield series. I use...

Empirical tests for bubbles typically focus on the stationarity properties of the dividend yield. Evidence of nonstationarity in the dividend yield is viewed as proof of bubbles, while stationarity is interpreted as absence of bubbles. For economies with arbitrary pricing kernels but stationary...

Rational bubbles in stocks can cause increases in trading volume, even after accounting for their expansionary effect on output and consumption. Trading volume increases are not caused by speculation driven by differences in beliefs. Dividend-bearing assets used to transfer resources...

We study the problem of allocating a bundle of perfectly divisible private goods from an axiomatic point of view, in situations where compensations can be made through monetary transfers. The key property we impose on the allocation rule requires that no agent should be able to gain by...

We study the problem of allocating a bundle of perfectly divisible private goods from an axiomatic point of view, in situations where compensations can be made through monetary transfers. The key property we impose on the allocation rule requires that no agent should be able to gain by...