Wealth Inequality and Safe Asset Demand -- by Xuning Ding, Zhengyang Jiang

We study how wealth inequality shapes safe-asset demand in heterogeneous-agent economies. Asset bubbles arise when agents face sufficiently high probabilities of falling into extreme poverty. In such cases, assets insulated from idiosyncratic risk become infinitely large relative to agents' wealth ex-post, which makes them infinitely valuable ex-ante. This mechanism is fundamentally different from classic rational bubbles, generates bubbles even under stationary wealth distributions, and requires no aggregate uncertainty or growth. Using this insight, we revisit the pricing of aggregate assets in standard heterogeneous-agent economies, and show that prior analyses may be incomplete due to overlooked possibility of transversality condition violation.