Brown Bag Seminar - Yenan Wang (University of Amsterdam), From Tulip to Gold: Rational Bubbles in Consumable Assets

Abstract:

Why do some bubbles survive as stores of value while others collapse? We study this question in an overlapping-generations model in which a consumable asset can be held for resale or consumed. Even a low consumption value eliminates the possibility of a continuum of self-fulfilling price paths sustained by a pure bubble and selects a unique equilibrium. When consumption value is stochastic, the prospect of a high-value state raises the asset’s capacity to transfer wealth across generations; when that state arrives, partial consumption reduces circulating supply and raises the price of the remaining units. With endogenous supply, bubble durability depends on scarcity. Elastic supply pushes the asset toward recurrent production and consumption, as with tulips, whereas inelastic supply can sustain a persistent store-of-value premium, as with gold. The framework also clarifies the limits of the “digital gold” analogy.