Abstract
This paper develops a finite-period model of rational bubbles where trade of an asset takes place through a chain of middlemen. We show that there exists a unique equilibrium, and a bubble can occur due to higher-order uncertainty. Under reasonable assumptions, the equilibrium price is increasing and accelerating during bubbles although the fundamental value is constant over time. Bubbles may be detrimental to the economy; however, bubble-bursting policies affect agents’ beliefs and it turns out that they have no effect on welfare. We also demonstrate that the possibility that middlemen obtain more information leads to larger bubbles.
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