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This note aims at assessing the temporal relationship that exists between the time reference of dynamic models with infinite and finite horizon. Specifically, comparing the optimal inter‐temporal plans arising from an infinite horizon model and a 2‐period overlapping generations model in their stationary equilibria, I suggest way to assess the number of time periods of the former that form a time unit of the latter. Relying on an argument grounded on consumption smoothing, I show that the theoretical length of a generation is an increasing function of the discount factor of the optimising agent. Moreover, from an empirical point of view, I give evidence that this analysis corroborates the well‐documented nexus that links demographic developments and the path of interest rates, and it offers interesting insights for the calibration of discount rates in computational models. [ABSTRACT FROM AUTHOR]

A seminal result Yaari holds that all pension savings should be in life-annuities. Annuities offer a higher return than standard assets and diversify mortality risk and therefore it is individually optimal to save in annuities only. This is a cornerstone result in the pensions literature where many attempts have been made to explain that individual savings in annuities is very low, the socalled annuity puzzle. But is the result that all pension savings should be in life-annuities also socially optimal? We show in a standard setting with fair annuities and dynamic efficiency that full annutization of all pensions saving is not socially optimal. Less than full annutization implies unintentional bequests and thus transfers from the old to the young, which is welfare improving under dynamic efficiency. Further, we show that no annutization can implement the Golden Rule capital stock level and analyse whether some annutization is socially optimal using a numerical analysis, which shows that it is the case under a wide range of parameter constellations. [ABSTRACT FROM AUTHOR]

In this paper, we develop an overlapping generation model with imperfect competition and land to provide a theoretical foundation for some empirical observations made since the end of the 1970s. The problem is that these new "stylized facts" do not coincide with Kaldor's stylized facts and unfortunately the standard growth models are not able to explain these new facts. By using our model, we are able to theoretically derive these new facts and to provide a theoretical foundation for them. In particular, increasing market concentration leads to a decline in the labor income share, to a decline in the capital income share, to a decline in the natural interest rate, to an increasing wealth to income ratio, and to an over-proportional increase in land prices in developed countries. The model developed for analysis has close similarity with the standard neoclassical overlapping generation model with endogenous growth and land. The main difference between the standard neoclassical and the model in this paper is the market structure. Instead of assuming perfectly competitive markets, we assume an oligopolistic market structure. This leads to the occurrence of pure profits for firms and, accordingly, the input factors are no longer paid their marginal products. [ABSTRACT FROM AUTHOR]

The emergence of a collaborative economy has been driven by advances in information technology that allow consumers to borrow and rent goods among peers on a secondary sharing market. In a dynamic setting, consumers make intertemporal decisions about purchases and their participation in the sharing market. This study introduces an overlapping-generations model to analyze product pricing and consumer choice with and without a sharing market. The model quantifies the impacts of a peer-to-peer economy on the demand for ownership, the product price, and all participants’ payoffs, including consumer surplus, profits, and social welfare. Given consumers that are heterogeneous with respect to their consumption needs and valuations, it illustrates which of them are prone to participate in a sharing economy and whether a retailer (or manufacturer) can benefit from the presence of a secondary exchange. A sharing market tends to increase the price of new products by a “sharing premium,” which positively depends on the retailer’s commitment ability. The price increment becomes relatively smaller for higher-cost products. Low-cost products and sufficiently impatient consumers together make a peer-to-peer economyunattractive for retailers. For high-cost products, however, the latter stand to gain from the existence of a sharing market. Most important, the introduction of a peer-to-peer economy increases both consumer surplus and social welfare, thus creating an implicit imperative for a social planner to help promote collaborative consumption, for instance, by providing incentives for retailers and manufacturers that tend to offset possible expected negative payoff effects from consumer sharing. [ABSTRACT FROM PUBLISHER]

An important aspect of the current COVID-19 crisis is that not all age groups are equally affected by the pandemic. To account for the generational impact of COVID-19, a dynamic overlapping generations model with realistic demography, human capital and NTAs is constructed. The COVID-19 crisis is modelled through two unexpected and temporary negative shocks: an economic shock that reduces labour income, and a demographic shock that increases the mortality hazard rates of those infected. The model is applied to 12 countries for which full NTA data are available. Results are presented for two extreme fiscal policies: one in which governments compensate workers for 0% (without fiscal support) of their total labour income losses due to the pandemic, and another in which governments compensate workers for 100% (with fiscal support) of these losses. In addition, I analyse the impact of these policies on public debt. The results show that COVID-19 is affecting the financial situations of people aged 25 to 64 and their children more than those of older people. By compensating workers for their income losses, the economic impact of COVID-19 has been more evenly distributed across cohorts, reducing the burden on people aged zero to 64, and increasing the burden on people aged 65 and older. Moreover, the simulation results show that a 1% decline in labour income leads to an average increase in the debt-to-total labour income ratio of between 1.2% (without fiscal policy) and 1.6% (with fiscal policy). [ABSTRACT FROM AUTHOR]

Most of the theoretical contributions on the relationship between economy and environment assume the environment as a good distributed homogeneously among agents. The aim of this work is to relax this hypothesis and to consider that the environment can have a local character even if conditioned through externalities by the choices made at the global level. In this article, we adapt the classical framework introduced in John and Pecchenino (Econ J 104(427):1393–1410, 1994) to analyze the dynamic relationship between environment and economic process, and we propose an OLG agent-based model where each agent perceives her own level of environmental quality determined by her own decisions, and by the decisions of those living around her. Despite the attention devoted to local environmental aspects, network externalities (determined through the scheme of Moore neighborhoods) play a fundamental role in defining environmental dynamics and they may induce the emergence of cyclical dynamics. The occurrence of oscillations in the local environmental quality is partially mitigated by the presence of heterogeneity in individuals' preferences. Finally, when a centralized planner is introduced, the dynamics converge to stationary values regardless of the assumption on heterogeneity of agents. [ABSTRACT FROM AUTHOR]

Recent years have seen an explosion of theoretical and empirical interest in the role that kin selection plays in shaping patterns of sexual conflict, with a particular focus on male harming traits. However, this work has focused solely on autosomal genes, and as such it remains unclear how demography modulates the evolution of male harm loci occurring in other portions of the genome, such as sex chromosomes and cytoplasmic elements. To investigate this, we extend existing models of sexual conflict for application to these different modes of inheritance. We first analyse the general case, revealing how sex-specific relatedness, reproductive value and the intensity of local competition combine to determine the potential for male harm. We then analyse a series of demographically explicit models, to assess how dispersal, overlapping generations, reproductive skew and the mechanism of population regulation affect sexual conflict across the genome, and drive conflict between nuclear and cytoplasmic genes. We then explore the effects of sex biases in these demographic parameters, showing how they may drive further conflicts between autosomes and sex chromosomes. Finally, we outline how different crossing schemes may be used to identify signatures of these intragenomic conflicts. [ABSTRACT FROM AUTHOR]

Empirically, revenues of public pension systems are more volatile than expenditures. Therefore, the question arises how the social security authority should buffer its revenues and adjust its contributions over the business cycle. This paper studies the corresponding effects on the life cycle of households and the business cycle in a large-scale overlapping generations model. In particular, the labor supply is endogenous and takes the intertemporal links between contributions and pension benefits into account. Sluggish adjustments of contribution rates that are implemented by adjusting a financial buffer stock both stabilize an economy and decrease the volatility of lifetime utilities of most workers and retirees, in contrast to sole adjustments of contribution rates. However, changes of consumption, capital income, or lump sum taxes, which aim to balance public pension budgets, improve the allocation of aggregate risk across cohorts for people up to an age of at least 71 years. [ABSTRACT FROM AUTHOR]

This paper uses the framework of an OLG economy with three-period lived agents in which a durable good serves as collateral for loans, to study the effect of an unanticipated income shock when the economy is in a steady state equilibrium. We focus on the consequence of default on loans when the value of the collateral falls below the value of the debt it secures. We analyze the impulse response functions of the price and production of the durable good and show that there is an asymmetry between the response of the price and investment of the durable good to a positive and a negative income shock arising from default on the collateralized loans. We show that this asymmetry can be seen in the data on housing prices and construction and is attributable to the default on mortgages in periods of decreasing prices which acts as a turbo mechanism magnifying the decline in investment.

We provide an ex ante welfare, fiscal and general macroeconomic evaluation of the voluntary old-age saving scheme recently introduced in Poland and known as Employee Capital Plans. ECPs provide tax redemptions as well as lump-sum transfers with the objective to foster old-age savings. A reduction in capital income tax revenue and a rise in expenditure need to be compensated for through adjustments in other taxes. We employ an overlapping-generations model (OLG) to gauge the plausible magnitude of macroeconomic and welfare effects and to provide insights into the microfoundations of these adjustments. Our OLG model features voluntary participation and innovates relative to the literature by introducing agents with hand-to-mouth preferences. We find a relatively strong crowding-out of private savings. In our preferred specification, roughly PLN 0.08–0.09 of every PLN 1 allocated to ECPs is actually new savings, the rest being displaced from unincentivised private voluntary savings. The plausible values of effective capital growth in ECPs range between 0.03 and 0.42 of PLN 1. ECPs reduce the welfare of fully rational agents unless a sufficiently large annuity is offered. ECPs provide consumption smoothing and interest income to HTM agents.

This contribution 1 1 This study is dedicated to the loving memory of Carine, a sunny human, a bright spirit and a stellar scholar that will be deeply missed. A very preliminary version by the third author was presented at a conference held at Meiji-Gakuin University. A more advanced one by the current set of authors got presented at a TMM conference held at HEC Montreal where it could benefit from a detailed report and numerous insightful suggestions from T. Seegmuller. The referees, the editor and the co-editors are finally warmly thanked for their incisive remarks and perspicacious hints that led to a significantly improved exposition. introduces a sectoral supply functions approach of equilibrium dynamics in the context of a simple model of overlapping generations with heterogeneous goods. The class of preferences that is here considered hinges upon an endogenous leisure motive and an elementary savings behaviour, that comes as a simpler alternative to the Diamond tradition in the benchmark contributions about the properties of overlapping generations economies with two industries. The presence of some institution making possible intergenerational transfers is shown to influence both the equilibrium aggregate factors shares and elasticity of substitution along a stationary equilibrium. Both Wealth-to-Capital and Golden Rule steady state equilibria being considered, the economies are categorised, either as Samuelsonian or classical, according to the sign of the transfers between generations at the Golden Rule steady state. The local stability properties of the various types of equilibria are successively investigated, the elasticities of substitution between the two inputs being emphasised to play a key-role for that purpose. Interestingly, the smoothing properties of factors substitution and their respective contribution to the obtention of the local uniqueness property may differ between the Samuelsonian and classical economies. • Nature of equilibria in overlapping generations with heterogeneous goods. • Substitution mechanisms for heterogeneous goods Wealth-to-Capital vs Golden Rule steady state equilibria. • Sign of the transfers between generations at the Golden Rule and in heterogeneous goods Samuelsonian vs classical economies. • Distinct smoothing properties of factors substitution in Samuelsonian and classical economies. [ABSTRACT FROM AUTHOR]

This article examines how pollution and its health effects during childhood can affect the dynamics of inequalities among households. In a model in which children's health is endogenously determined by pollution and the health investments of parents, we show that the economy may exhibit inequality in the long run and be stuck in an inequality trap with steadily increasing disparities, because of pollution. We investigate if an environmental policy, consisting in taxing the polluting production to fund pollution abatement, can address this issue. We find that it can decrease inequality in the long run and enable to escape from the trap if the emission intensity is not too high and if disparities are not too wide. Otherwise, we reveal that a policy mix with an additional subsidy to health expenditure may be a better option, at least if parental investment on children's health is sufficiently efficient. • Model with endogenous disparities in the health effects of pollution during childhood. • Pollution fosters human capital inequality through its health effects on children. • Pollution may lead the economy to a trap with steadily increasing disparities. • An environmental policy alone can reduce inequality but not systematically. • A policy mix with an additional subsidy to health expenditure may be a better option. [ABSTRACT FROM AUTHOR]

This paper studies the impact of migration and workers' remittances on human capital and economic growth when young individuals face debt constraints to finance education. We consider an overlapping generations model à la de la Croix and Michel (2007). In this no-commitment setting, education is the engine of growth. Individuals may choose to default on their debt and be excluded from the asset market. We show that remittances tend to tighten the borrowing constraints for a given level of interest rate, but may enhance growth at the equilibrium. The model replicates both negative and positive impacts of migration and remittances on economic growth underlined by the empirical literature. We calibrate the model for 30 economies. • In an OLG growth model, remittances may generate multiple equilibria. • Remittances decrease the agents' incentive to save. • Remittances tend to reinforce endogenous financial constraints. • The global effect of remittances depends on the interest rate response. • Migration and remittances improve economic growth in 70% of countries. [ABSTRACT FROM AUTHOR]

The social and economic developments in European countries have put pressure on their national budgets and threaten the sustainability of public policies. The traditional fiscal indicators, specifically, the deficit and the debt, which are still used today as guiding tools, have proved to be insufficient, due to their arbitrary nature and short-term focus. In this paper, we resort to an alternative fiscal indicator, known as 'generational accounting', which is able to incorporate the future changes in the demographic structure of the population, and their corresponding impact on public accounts. It is also able to evaluate how current fiscal policy affects, not only, current generations, but also future generations. We apply this methodology to assess the long-term fiscal situation of Portugal, and compare the results with those obtained in 1999. In this context, we also explore additional scenarios, as well as additional indicators, in order to provide some robustness to our findings. Our results show that, if the current fiscal policy is not significantly changed, future generations will face a much heavier fiscal burden than current generations. [ABSTRACT FROM AUTHOR]

Pensions may be provided for in a modern society by a mix of several methods, namely by voluntary individual savings, mandatory fully-funded occupational pension systems, mandatory social security financed by pay-as-you-go, and old-fashioned hoarding in cash. We call a specific mixture of the four systems a pension composition. We assume that individual workers decide on their own individual savings, that the fully-funded occupational system is decided upon by the age cohort of the median worker, and that social security is decided upon by the median voter. We assume that individual and collective pension savings are the only sources of capital supply. When capital supply equals demand from industry, there is equilibrium in the capital market with a corresponding equilibrium interest rate and pension composition. In this paper, we assume a demography with one hundred age brackets and we investigate how changes in the birth rates, survival rates, and the retirement age affect the pension composition and the capital market equilibrium. Our conclusion is that for a given technology, the pension composition and the interest rate are determined by the demography and cannot be modified at will as a long-term political instrument. [ABSTRACT FROM AUTHOR]

Striving to improve social position via consumption generate resources exhaustion, as not all of us can enhance our social position. Status concern behaviour ought thus to be likely harmful to the environment. Nevertheless, numerous investigations show that status concern and growth are linked, and several investigations categorized as Environmental Kuznets curves, show that growth in fact ameliorates the environment. If status concern boosts growth it even may, in the long run, ameliorates the environment. How does status seeking behaviour influence the environment? We examine this question using an overlapping generations model including status and environmental externalities. It is shown that striving for status has both negative and positive impacts on environmental quality. Whether the positive impact dominates the negative one depends on the degrees of status seeking, environmental externalities and the size of the economy. [ABSTRACT FROM AUTHOR]

The prevailing literature discusses intergenerational trade-offs in climatechange predominantly in terms of the Ramsey equation relying on the infinitelylived agent model. We discuss these trade-offs in a continuous time OLG framework and relate our results to the infinitely lived agent setting. We identify three shortcomings of the latter: First, underlying normative assumptions about social preferences cannot be deduced unambiguously. Second, the distribution among generations living at the same time cannot be captured. Third, the optimal solution may not be implementable in overlapping generations market economies.

Tax devaluation typically involves the reduction of social security contributions on the payroll with the increase of tax on consumption. This study evaluates the impact of fiscal devaluation in Brazil on consumption, capital, output and income distribution between generations. It uses a dynamic general equilibrium model with overlapping generations, finite life spans, risk of death and social security. The results suggest that the fiscal devaluation causes positive, yet modest, impact on product, capital and long-term consumption without major sacrifices for the economy in its transition path.

The paper revises the redistributive channels of monetary policy transmission and their impact on income and wealth distributions in a New-Keynesian Overlapping Generations (OLG) model. The model mimics total asset holdings and earnings processes of several types of households across generations, based on their attitude to saving and income group. In this environment, expansionary monetary shocks stimulate capital and debt accumulation to a larger extent for middle-aged individuals, contributing to intergenerational inequality. Heterogeneity of labor income augments this effect, benefitting richer and more productive workers.

Using cross‐country establishment‐level data, I show that employment profiles over a firm's life cycle are flatter in fast‐growing economies than in slow‐growing economies. The difference in average employment over the firm's life cycle increases with plant age. I propose a frictionless overlapping‐generations model with exogenous technological progress. Firm productivity also depends on entrepreneurs' skills. Entrepreneurs can increase their skills over their life cycle, but the growth of the vintage component of younger cohorts' skills is higher in fast‐growing economies than in slow‐growing economies. This model is able to explain most of the differences observed in the sample between fast‐growing and slow‐growing economies. [ABSTRACT FROM AUTHOR]

We study the consequences of age-dependent preferences for economic growth and structural change in a two-sector model with overlapping generations and non-dimishing returns to capital. Savings and accumulation rates depend on the relative price of services consumed by old agents and on the intergenerational distribution of income. The feedback effects originating in preferences and income distribution yield three possible long-run growth outcomes: sustained endogenous growth, decumulation traps, and bounded accumulation. In the endogenous growth scenario, the transition features rising savings and accumulation rates accompanied by distributional shifts in favor of young workers, growing employment and rising prices in the service sector. Traps are triggered by initially low capital in manufacturing and low employment in services. Bounded accumulation yielding zero long-run growth in per capita incomes is induced by preferences, not by diminishing returns to capital. [ABSTRACT FROM AUTHOR]

In their quest for universal health coverage (UHC), many developing countries use alternative financing strategies including general revenues to expand health coverage to the whole population. Unless a policy adjustment is undertaken, future generations may foot the bill of the UHC. This raises the important policy questions of who bears the burden of UHC and whether the UHC-fiscal stance is sustainable in the long term. These two questions are addressed using an overlapping generations model within a general equilibrium (OLG-CGE) framework applied to Palestine. We assess and compare alternative ways of financing the UHC-ridden deficit (viz. deferred-debt, current and phased-manner finance) and their implications on fiscal sustainability and intergenerational inequalities. The policy instruments examined include direct labour-income tax and indirect consumption taxes as well as health insurance contributions. Results show that in the absence of any policy adjustment, the implementation of UHC would explode the fiscal deficit and debt-GDP ratio. This indicates that the UHC-fiscal stance is rather unsustainable in the long term, thus, calling for a policy adjustment to service the UHC debt. Among the policies we examined, a current rather than deferred-debt finance through consumption taxation emerged to be preferred over other policies in terms of its implications for both fiscal sustainability and intergenerational inequality. [ABSTRACT FROM AUTHOR]

We study medical progress within a two-sector economy of overlapping generations subject to endogenous mortality. Individuals demand health care with a view to lowering mortality over their life-cycle. We characterise the individual optimum and the general equilibrium, and study the impact of a major medical innovation leading to an improvement in the effectiveness of health care. We find that general equilibrium effects dampen strongly the increase in health care usage following medical innovation. Moreover, an increase in savings offsets the negative impact on GDP per capita of a decline in the support ratio. Finally, we show that the reallocation of resources between the final goods and health care sector, following the innovation, plays a crucial role in shaping the general equilibrium impact. [ABSTRACT FROM AUTHOR]

This paper investigates the effects of parenting time on macroeconomic outcomes and welfare when parenting choices are determined by own childhood experience and social norms in an overlapping generations framework. Parenting time and material expenditures on children generate children's human capital. When the share of parenting time is relatively low and parenting and leisure are complements or weak substitutes the model has two steady-state equilibria with different welfare levels. In the high-welfare equilibrium parents have stronger endogenous taste for parenting and spend more time with children and less in paid work. Higher productivity due to the higher human capital more than compensates for the reduction in working hours, leading to a higher output level, in comparison to the low-welfare equilibrium. [ABSTRACT FROM AUTHOR]

We construct and parameterize an overlapping generations model for an open economy with individuals who differ in innate ability. Key endogenous variables are hours worked, investment in human and physical capital, and per capita growth. The model replicates important data in Belgium since 1960 remarkably well. Simulating it, we observe that behavioral adjustments by households and firms contribute to reverse the negative arithmetical effect of future demographic change on per capita growth. Individuals work and study more. However, with unchanged policies, there remains a net negative effect on annual per capita growth of almost 0.3%-points on average in the next 25 years. This is mainly due to adverse consequences of reduced fertility and a declining working-age population on (the return to) physical capital investment. Model projections also point to rising income inequality induced by demographic change. Differences in the capacity of individuals to respond to increasing life expectancy by investing in education, and by saving, are key. [ABSTRACT FROM AUTHOR]

Abstract From 1850 to 2000, in Western European countries life expectancy rose from 30–40 to 80 years and the average number of children per woman fell from 4 to 5 children to slightly more than one. To gauge the economic consequences of these demographic trends, we implement an overlapping generations model with heterogeneity by level of education in which individuals optimally decide their consumption of market- and home-produced goods as well as the time spent on paid and unpaid work. We find that around 17$$\%$$ % of the observed increase in per-capita income growth from 1850 to 2000 was due to the demographic transition. Around 50$$\%$$ % of the demographic contribution is explained by the increase in the average productivity per worker (productivity component), which arises from the change in the population’s age structure and the rise in households’ saving rate. The remaining 50$$\%$$ % is explained by the higher growth rate of workers relative to the total population (translation component).

This paper examines the intergenerational costs and benefts of environmental regulation in the context of climate change. We believe this issue has not been adequately addressed in comparison with the search for efficiency-induced outcomes in the relevant literature. The cost-benefit analysis employs a decentralized two-period overlapping generations framework based on the standard assumptions of the integrated assessment models. This structure allows us to capture realistic market imperfections arising from individual heterogeneity and productive activities across generations. On the policy front, we assume that the Kyoto Protocol, which is the most prominent global initiative, is strictly binding. Our results from numerical simulations indicate that the emissions stabilization policy is costly with some unpleasant implications for current and near future generations. The benefits of the Protocol will not be likely to appear for a long period oftime. Yet, the more detrimental the environmental deterioration is, the sooner the net benefit of stabilization policy will be.

We set up an overlapping-generations model with endogenous fertility to study pensions policies in an ageing economy. We show that an increasing life expectancy may not be detrimental for the economy or the pension system itself. On the other hand, conventional policy measures, such as increasing the retirement age or changing the social security contribution rate could have undesired general equilibrium effects. In particular, both policies decrease capital per worker and might have negative effects on the fertility rate, thus exacerbating population ageing. [ABSTRACT FROM AUTHOR]

A well‐established result in the literature is that Social Security reduces steady state welfare in a standard life cycle model. However, less is known about the historical quantitative effects of the program on agents who were alive when the program was adopted. In a computational life cycle model that simulates the Great Depression and the enactment of Social Security, this paper quantifies the welfare effects of the program's enactment on the cohorts of agents who experienced it. In contrast to the standard steady state results, we find that the adoption of the original Social Security generally improved these cohorts' welfare, in part because these cohorts received far more benefits relative to their contributions than they would have received if they lived their entire life in the steady state with Social Security. Moreover, the negative general equilibrium welfare effect of Social Security associated with capital crowd‐out was reduced during the transition, because it took many periods for agents to adjust their savings levels in response to the program's adoption. The positive welfare effect experienced by these transitional agents offers one explanation for why the program that may reduce welfare in the steady state was originally adopted. [ABSTRACT FROM AUTHOR]

The rise of early retirement in Europe is typically attributed to the European system of taxes and transfers. A model with an imperfectly competitive labor market allows us to consider also the effects of bargaining power and of matching efficiency on pre‐retirement. We find that lower bargaining power of workers and declining matching efficiency have been important determinants of early retirement in France and Germany. These structural changes, combined with early retirement transfers and population aging, are also consistent with the employment and unemployment rates, labor share and seniority premia. [ABSTRACT FROM AUTHOR]

In this paper, we consider the unequal distribution of climate change damages in the world and we examine how the underlying costs can spread from a vulnerable to a non-vulnerable country through international trade. To focus on such indirect effects, we treat this topic in a North–South trade overlapping generations model in which the South is vulnerable to the damages entailed by global pollution while the North is not. We show that the impacts of climate change in the South can be sources of welfare loss for northern consumers in both the long and the short run. In the long run, an increase in the South's vulnerability can reduce the welfare in the North economy even in the case in which it improves the terms of trade of the North. In the short run, the South's vulnerability can also represent a source of intergenerational inequity in the North. Therefore, we emphasize the strong economic incentives for non-vulnerable—and a fortiori less vulnerable—economies to reduce the climate change damages on more vulnerable countries. [ABSTRACT FROM AUTHOR]

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By considering a simple endogenous growth model, we propose a new theoretical channel through which the presence of asset bubbles can promote economic growth. In the model economy, long-lived value-maximizing firms continuously improve the quality of their specific products through in-house research and development (R&D), while simultaneously new firms enter into the market. The key feature is endogenous market structure: The number of firms is endogenously determined, which leads to variation in firm size measured in terms of the scale of production at the level of an individual firm. The presence of asset bubbles unambiguously gives rise to larger firms. This allows in-house R&D expenditure to be spread over the greater numbers of goods that the firms produce, which can increase incentives to undertake in-house R&D. [ABSTRACT FROM AUTHOR]