Working Paper（26-001E）Endogenous collapse of resource-rational bubbles

We consider asset-price bubbles with a finite time horizon. Bubbles emerge because of incomplete information on the timing of trades. We analyze investors’ decision making on the cognitive investment (C-investment) that restores the complete information and show that the bubbles endogenously collapse. With investors having the option of C-investment, the asset price grows acceleratedly, and explodes with a higher probability as it grows higher. The bubbles collapse when the condition for optimality of the C-investment is satisfied, though the C-investment does not actually take place in equilibrium.

Key words: Finite time horizon, incomplete information, cognitive resources

JEL Classification: D52, E44