We present a detailed investigation of chaotic inflation models which
feature two scalar fields such that one field (the inflaton) rolls whi
le the other is trapped in a false vacuum state. The false vacuum beco
mes unstable when the magnitude of the inflaton field falls below some
critical value, and a first- or second-order transition to the true v
acuum ensues. Particular attention is paid to the case termed ''hybrid
inflation'' by Linde, where the false vacuum energy density dominates
so that the phase transition signals the end of inflation. We focus m
ostly on the case of a second-order transition, but treat also the fir
st-order case and discuss bubble production in that context for the fi
rst time. False-vacuum-dominated inflation is dramatically different f
rom the usual true vacuum case, both in its cosmology and in its relat
ion to particle physics. The spectral index of the adiabatic density p
erturbation originating during inflation can be indistinguishable from
1, or it can be up to ten percent or so higher. The energy scale at t
he end of inflation can be many orders of magnitude less than the valu
e 10(16) GeV, which is usual in the true vacuum case. Reheating occurs
promptly at the end of inflation. Cosmic strings or other topological
defects are almost inevitably produced at the end of inflation, and i
f the inflationary energy scale is near its upper limit they contribut
e significantly to large scale structure formation and the cosmic micr
owave background anisotropy. Turning to particle physics, false vacuum
inflation occurs with the inflaton field far below the Planck scale a
nd is therefore somewhat easier to implement in the context of supergr
avity than true vacuum chaotic inflation. The smallness of the inflato
n mass compared with the inflationary Hubble parameter still presents
a difficulty for generic supergravity theories. Remarkably, however, t
he difficulty can be avoided in a natural way for a class of supergrav
ity models that follow from orbifold compactification of superstrings.
This opens up the prospect of a truly realistic superstring-derived t
heory of inflation. One possibility, which we show to be viable at lea
st in the context of global supersymmetry, is that the Peccei-Quinn sy
mmetry is responsible for the false vacuum.