Relative Wealth Concerns and Complementarities in Information Acquisition
50 Pages Posted: 16 Feb 2009
Date Written: February 13, 2009
This paper studies how relative wealth concerns, in which a person's satisfaction with their own consumption depends on how much others are consuming, affect investors' incentives to acquire information. We find that such externalities can generate complementarities in information acquisition within the standard rational expectations paradigm. When agents are sensitive to the wealth of others, they herd on the same information, trying to mimic each other's trading strategies. We show that there can be multiple herding equilibria in which some assets receive considerable attention while others with similar characteristics are ignored. Further, different communities of agents may specialize in different assets. This multiplicity of equilibria generates jumps in asset prices: an infinitesimal shift in fundamentals can lead to a discrete price movement.
Keywords: Keeping up with the Joneses, Consumption externalities, Complementarities in information acquisition, Jumps in asset prices
JEL Classification: D82, G14
Suggested Citation: Suggested Citation