Bubble on real estate: the role of altruism and fiscal policy

Abstract

In this paper, we are interested in the interplay between real estate bubble, aggregate capital accumulation and taxation in an overlapping generations economy with altruistic households. We consider a three-period overlapping generations model with three key elements: altruism, portfolio choice, and financial market imperfections. Households realise different investment decisions in terms of asset at different periods of life, face a binding borrowing constraint and leave bequests to their children. We show that altruism plays a key role on the existence of a productive real estate bubble, i.e. a bubble in real estate raising physical capital stock and aggregate output. The key mechanism relies on the fact that a real estate bubble raises income of retired households. Because of higher bequests, there children are able to invest more in productive capital. Introducing fiscal policy, we show that raising real estate taxation dampens capital accumulation. JEL classification: E22; E44; G11.

Rational housing demand bubble

“…Since the most interesting case is the equilibrium with a housing demand bubble, we will deeply analyze this type of equilibria and study its dynamics. 12 Remind that in presence of a housing demand bubble, the borrowing constraint is always binding. We deduce from Eq.…”

Ascendant altruism and asset price bubbles

“…Bosi et al (2018b) investigate the effects of descending altruism on the dynamics of bubbles of an asset with non‐stationary dividends in a two‐period OLG model. Clain‐Chamosset‐Yvrard and Seegmuller (2019) study the interplay between real estate bubbles, capital accumulation and taxation in a three‐period OLG model with descending altruism. Although they employ different models, both Bosi et al (2018b) and Clain‐Chamosset‐Yvrard and Seegmuller (2019) suggest that a sufficiently high degree of descending altruism may promote a productive real estate bubble.…”