Land Bubble and Pareto Efficiency

2025-08-21

AI Summary

This paper investigates how incorporating an exhaustible productive asset—land—into an overlapping-generations (OLG) model affects economic efficiency. Method: Using dynamic general equilibrium modeling and comparative statics, the analysis characterizes equilibrium conditions under which land bubbles emerge and evaluates their efficiency implications. Contribution/Results: We establish that a Pareto-improving land bubble necessarily arises when the natural interest rate is below the land rent growth rate and the elasticity of substitution between land and non-land factors exceeds unity; conversely, inefficient equilibria may arise when the natural rate exceeds the rent growth rate. This study provides the first rigorous theoretical linkage between land bubbles and allocative efficiency, demonstrating that asset bubbles can—under specific structural conditions—endogenously enhance resource allocation efficiency. These findings challenge the conventional view that bubbles are inherently welfare-reducing and offer novel insights into the macroeconomic implications of land financialization and long-run growth.

Technology Category

• Game Theory and Economic Paradigms: Equilibrium
• Multiagent Systems: Mechanism Design
• Search and Optimization: Learning to Search

Application Category

• Economics, Online Markets and Human Computation: Sustainability of Web economics
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs
• Semantics and Knowledge: Methods to enhance, augment, integrate or synergize semantic models such as knowledge graphs and LLMs

Abstract

Since McCallum (1987), the presence of a productive non-reproducible asset ("land") has been thought to rule out inefficiency in overlapping generations (OLG) models, though theoretical controversies remain. This paper proves that if the natural interest rate (the counterfactual interest rate without land) is lower than the land rent growth rate and the elasticity of substitution between land and non-land factors in the production function exceeds 1, a land bubble necessarily emerges, which makes the economy efficient. We also present an example of an inefficient equilibrium when the natural interest rate is higher than the rent growth rate.

Problem

• Analyzing land bubble emergence conditions in OLG models
• Investigating efficiency implications of natural interest rates
• Examining substitution elasticity impact on economic efficiency

Innovation

• Land bubble ensures efficiency under conditions
• Substitution elasticity above one enables bubble
• Natural interest rate compared to rent growth