Speculative Bubbles and Talent Misallocation

There is increasing evidence that the vibrant financial industry has generated a misallocation of human capital between the manufacturing sector and the service sector. In addition, growth in the financial sector has usually been accompanied by bubble booms. Thus, this paper advances a greater fool-theoretical approach to talent misallocation when an economy experiences speculation-driven extrapolative bubbles. The equilibrium allocation of talent in the decentralized economy encourages too many agents to enter the financial sector. Not only do the overcrowded markets in the financial sector per se generate a negative externality on the manufacturing sector, but speculation is also a source of financial fragility. The reason for this is that when agents make decisions based on their information sets, they ignore the negative externality of congestion and the impact of the endogenous bubble-burst probability of their entry into the financial sector. An optimal policy across sectors is then proposed to fix the talent misallocation caused by speculative bubbles