The provided excerpts do not contain substantive content related to the question on how asset bubbles solve the capital over-accumulation problem in overlapping generations models. They are primarily error messages or access issues from ScienceDirect and Cambridge.org, without any relevant economic theory or empirical explanation.
Without direct source material from the excerpts, I will answer based on established economic theory and literature on the topic.
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**Hook**
Capital over-accumulation is a classic problem in overlapping generations (OLG) economic models, where excessive saving leads to inefficiently high capital levels and suboptimal economic outcomes. Remarkably, asset bubbles—often seen as harmful market distortions—can play a counterintuitive role in resolving this inefficiency by providing an alternative store of value that diverts excess savings away from physical capital accumulation.
**Short Answer**
In overlapping generations models, asset bubbles help solve the capital over-accumulation problem by creating alternative assets that absorb excess saving, preventing inefficiently high capital stock and thus improving overall economic welfare.
**Understanding the Capital Over-Accumulation Problem in OLG Models**
Overlapping generations models, a framework introduced by economists like Paul Samuelson and Peter Diamond, analyze economies with multiple cohorts coexisting and interacting over time. One well-known feature of certain OLG models is the possibility of capital over-accumulation: when individuals save too much, the economy ends up with more physical capital than is socially optimal. This excess capital reduces the marginal productivity of capital, leading to lower returns on investment and potentially welfare losses.
The problem arises because individuals save for retirement but do not internalize the negative externalities their saving imposes on future generations. This can cause the economy to settle into an equilibrium with capital stocks beyond the golden rule level—where the marginal product of capital equals the population growth rate plus depreciation. Consequently, output per capita and consumption can be lower than what could be achieved with a more balanced capital stock.
**Role of Asset Bubbles as an Alternative Store of Value**
Asset bubbles, particularly in the form of overvalued assets whose prices exceed fundamental values, create an alternative channel for saving. Instead of all savings funneling into physical capital (like machinery or infrastructure), some savings are diverted into these financial assets. Because these assets do not contribute directly to productive capacity, their inflated prices absorb excess savings that would otherwise exacerbate capital over-accumulation.
In this way, bubbles act as a mechanism to reduce the inefficient build-up of physical capital. The presence of a bubbly asset effectively relaxes the constraints on intergenerational transfers of wealth by providing a non-productive but highly liquid store of value that can be traded across generations. This can lead to equilibria where the capital stock remains at or closer to the optimal level, improving consumption and welfare outcomes.
**Mechanics in Overlapping Generations Framework**
In the OLG model context, agents live for two periods: young and old. The young work and save for retirement, while the old consume their savings. Normally, savings go into physical capital, which produces output in the next period. However, if the economy is prone to over-accumulation, the return on capital falls below the rate of time preference, discouraging additional saving.
Introducing an asset bubble—say, a speculative asset with price dynamics not tied directly to fundamentals—allows agents to hold wealth that yields capital gains or losses unrelated to physical capital returns. This speculative asset can sustain a price bubble because agents expect to sell it at a higher price to the next generation.
By diverting some saving into this bubbly asset, the economy avoids an inefficiently large physical capital stock. The bubbly asset essentially "soaks up" excess saving, preventing the capital stock from growing beyond the optimal level. This mechanism can yield a Pareto improvement over the no-bubble scenario.
**Implications and Insights**
While asset bubbles are often viewed negatively due to their instability and potential to burst, in the theoretical setting of OLG models they provide a valuable role as a self-correcting mechanism for capital over-accumulation. This insight challenges the simplistic view that bubbles are purely detrimental.
However, this resolution comes with caveats. A bubble economy may be more fragile, susceptible to crashes that can harm welfare. The long-term sustainability of bubbly equilibria is also debated—bubbles may only persist under certain expectations or institutional conditions.
Empirical evidence for this mechanism is subtle but can be linked to observations of financial markets where speculative asset prices coexist with slower growth in physical capital investment. Moreover, policy implications suggest that regulating or completely suppressing speculative bubbles might not always improve welfare if it leads to unmitigated capital over-accumulation.
**Takeaway**
Asset bubbles, often maligned as destabilizing forces, can paradoxically solve the capital over-accumulation problem in overlapping generations models by providing an alternative outlet for excess saving. This mechanism helps maintain an optimal capital stock and improves intergenerational welfare, though it introduces new risks and complexities. Understanding this nuanced role enriches our perspective on financial markets and the interplay between savings, investment, and economic growth.
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While the original excerpts did not provide detailed content, the above synthesis is grounded in well-known economic theory related to overlapping generations models and asset bubbles. For deeper study, one might consult leading economic texts and papers on OLG models, capital accumulation, and asset pricing theory from sources such as the Journal of Economic Theory, Econometrica, and books on macroeconomic growth theory. Unfortunately, without specific excerpts, I cannot cite URLs directly from the provided domains. However, reputable sources on these topics include:
- sciencedirect.com (search for overlapping generations and asset bubbles) - cambridge.org (economic theory journals) - nber.org (National Bureau of Economic Research working papers) - jstor.org (economic journals archives) - econpapers.repec.org (research papers) - scholar.google.com (academic articles on OLG and bubbles)
These platforms contain extensive literature exploring the complex relationship between asset bubbles and capital accumulation in OLG frameworks.
