Jared Bernstein (Economic Policy Institute), Aneil Kovvali (Yeshiva University – Benjamin N. Cardozo School of Law), and Jeffery Y. Zhang (University of Michigan Law School) have posted Constructive Bubbles (Journal of Corporation Law, forthcoming) on SSRN. Here is the abstract:
Speculative bubbles are typically treated as pathologies to be prevented or deflated as quickly as possible. This Article challenges that premise—not by defending speculation, but by drawing a distinction the standard view obscures. It argues that while some bubbles are deeply destructive, others have played an underappreciated role in financing transformative innovation and infrastructure that rational markets would otherwise undersupply.
Drawing on economic theory and historical experience, the Article distinguishes between two different types of bubbles: finance-driven bubbles, which are fueled primarily by leverage, financial engineering, and mispriced risk; and real economy bubbles, which arise from genuine excitement about new technologies or infrastructure with broad potential to improve productivity. Finance-driven bubbles tend to generate systemic fragility with few lasting benefits. Real economy bubbles, despite imposing severe private losses when they burst, have repeatedly financed socially valuable projects—from railroads and electrification to telecommunications and information technology—that endured long after speculative excess collapsed.
This distinction has important implications for law. Rather than treating all bubbles as uniformly harmful, legal institutions should adopt a more nuanced approach that channels speculative energy toward productive ends, limits spillovers onto vulnerable populations, and facilitates rapid recovery after bubbles burst. The Article develops a lifecycle framework for legal intervention. It addresses the inflation, management, and unwinding of bubbles and evaluates the roles of financial regulation, securities law, antitrust, and public financing at each stage.
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