Asset bubbles in an overlapping generations model with endogenous labor supply

- When labor supply is elastic, rational bubbles can lead to an expansion in economic activities.
- This happens when the IES in consumption is small and the Frisch elasticity of labor supply is large.
- These results are shown analytically, followed by a specific numerical example.

This paper examines the effects of asset bubbles in an overlapping generations model with endogenous labor supply. We show analytically that asset bubbles can lead to an expansion in steady-state capital, investment, employment and output under certain conditions.