  We propose a continuous-time model of trading with heterogeneous beliefs.
Risk-neutral agents face quadratic costs-of-carry on positions and thus their
marginal valuations decrease with the size of their position, as it would be
the case for risk-averse agents. In the equilibrium models of heterogeneous
beliefs that followed Harrison-Kreps, investors are risk-neutral, short-selling
is prohibited and agents face constant marginal costs of carrying positions.
The resulting resale option guarantees that the price exceeds the price of the
asset when speculation is ruled out; the difference is identified as a bubble.
In our model increasing marginal costs entail that the price depends on asset
supply. Second, agents also value an option to delay, and this may cause the
market to equilibrate below the buy-and-hold price. Third, we introduce the
possibility of short-selling. A Hamilton-Jacobi-Bellman equation of a novel
form quantifies precisely the influence of the costs-of-carry on the price. An
unexpected decrease in shorting costs may lead to the collapse of a bubble;
this links the financial innovations that facilitated shorting of MBSs to the
subsequent collapse of prices.
