Relative Wealth Concerns and Complementarities in Information Acquisition

50 Pages Posted: 25 Mar 2008 Last revised: 26 Oct 2008

See all articles by Günter Strobl

Günter Strobl

University of Vienna - Department of Finance

Diego Garcia

University of Colorado at Boulder - Leeds School of Business

Date Written: October 7, 2008

Abstract

Economists have long believed that relative consumption effects, in which a person's satisfaction with their own consumption depends on how much others are consuming, are important. This paper studies how relative wealth concerns affect investors' incentives to acquire information. We find that such consumption externalities can generate complementarities in information acquisition within the standard rational expectations paradigm. Rather intuitively, when agents care about each other's wealth, multiple equilibria can arise, in which agents mimic each other's information acquisition decisions. We further show how this multiplicity of equilibria can endogenously generate jumps in asset prices: an infinitesimal shift in fundamentals can lead to a discrete price movement. Crashes in our model are accompanied by an increase in the equity premium and a reduction in price informativeness.

Keywords: Keeping up with the Joneses, Consumption externalities, Complementarities in information acquisition, Jumps in asset prices

JEL Classification: D82, G14

Suggested Citation

Strobl, Günter and Garcia, Diego, Relative Wealth Concerns and Complementarities in Information Acquisition (October 7, 2008). AFA 2009 San Francisco Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1108679 or http://dx.doi.org/10.2139/ssrn.1108679

Günter Strobl

University of Vienna - Department of Finance ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria

Diego Garcia (Contact Author)

University of Colorado at Boulder - Leeds School of Business ( email )

Boulder, CO 80309-0419
United States

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