Abstract
I extend Akerlof's (1970) adverse selection model, where uninformed participants withdraw from the market, and show that rather than collapse, lemons can, and often do, lead to a negative bubble. A mirror image of his model, where uninformed participants pursue dreams (for example, purchasing lottery tickets), can lead to a positive bubble that ultimately causes informed experts to withdraw. When the supply of assets is unlimited, a positive bubble can persist when there is systematic favorable -- but incorrect -- information (as might result from advertising), a preference for skewness, or an optimistic bias on the part of uniformed participants. I also argue that, because prices of antiques, collectibles, and other objects d'art are typically based primarily on sentiment, such assets trade persistently in a positive bubble.
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