Relative Wealth Concerns and Complementarities in Information Acquisition

50 Pages Posted: 16 Feb 2009

See all articles by Diego Garcia

Diego Garcia

University of Colorado at Boulder - Leeds School of Business; University of North Carolina (UNC) at Chapel Hill - Finance Area

Günter Strobl

University of Vienna - Department of Finance

Date Written: February 13, 2009

Abstract

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

Garcia, Diego and Strobl, Günter, Relative Wealth Concerns and Complementarities in Information Acquisition (February 13, 2009). EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1342787 or http://dx.doi.org/10.2139/ssrn.1342787

Diego Garcia

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

Boulder, CO 80309-0419
United States

University of North Carolina (UNC) at Chapel Hill - Finance Area

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

Günter Strobl (Contact Author)

University of Vienna - Department of Finance ( email )

Oskar-Morgenstern-Platz 1
Vienna, 1090
Austria

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