👍Unbalanced Growth and Land Overvaluation

This is my fourth paper on rational bubbles. The first paper is “Necessity of Rational Asset Price Bubbles in Two-Sector Growth Economies”, which we posted on arXiv in December 2022. (The paper is still unpublished and its title has changed a few times, though we expanded the example in Section 2.2.1 as an independent paper and published at JPE.) The second paper is “Equilibrium Selection in Pure Bubble Models by Dividend Injection”, which we posted on arXiv in March 2023 and still unpublished. The third paper is “Housing Bubbles with Phase Transition”, which we also posted on arXiv in March 2023 and still unpublished.

When we initially discovered the necessity of bubbles (i.e., bubbles inevitably emerge under some conditions), the example was based on an endowment economy with growth and constant dividends. After discovering this example, I became interested in applications. Because land and housing are typical assets on which bubbles often arise (at least in the casual sense), I worked on several models that could generate endogenous dividends. After some trial and error, I realized that the elasticity of substitution (either in the utility function of the production function) plays an important role: once we remove the knife-edge restriction of elasticity being exactly equal to 1 (Cobb-Douglas), the economy and dividends grow at different rates (unbalanced growth), which generates bubbles under a low interest rate condition. This paper emerged from this idea: empirical evidence suggests that the elasticity of substitution between land and non-land factors exceeds 1, so when the economy grows, land rents do not grow as fast and generates a land bubble.

We submitted the paper to American Economic Review in July 2023. We got rejected in October 2023 with one positive report, one on the fence, and one negative. Around that time, we got an R&R from JPE for the necessity paper, so we thought it more advantageous to wait until JPE accepts the paper to have a better reputation. Therefore, we let the paper be dormant for a year, and I used this paper as my job market paper when I was on the market in Fall 2023. After JPE accepted our paper, we revised the unbalanced growth paper. Because some AER referees asked for more empirical work, which we don’t have any expertise, we shortened the paper and submitted to American Economic review: Insights in August 2024. We got rejected in November 2024 with just one, one-page report.

At that point we had too many pending projects, and we had no intention of bloating the paper with empirical work or extensions, so we decided to submit the paper to Proceedings of the National Academy of Sciences in November 2024, which is a top science journal. (And being a science journal, papers are much more concise than those in economics journals. An added benefit of PNAS is that you can suggest 6 potential reviewers and 3 you would like to exclude from reviewing, so we can suggest true experts and avoid people with conflicts of interest.) We received a minor R&R with two positive reports in December 2024 and got accepted shortly after we resubmitted in February 2025. I have been submitting hundreds of papers to different journals, but science journals provide far better experience than economics journals.