Misery Loves Company: Equilibrium Portfolios with Heterogeneous Consumption Externalities

24 Pages Posted: 28 Oct 2004

See all articles by Christian Gollier

Christian Gollier

University of Toulouse 1 - Industrial Economic Institute (IDEI); CESifo (Center for Economic Studies and Ifo Institute)

Abstract

The present article extends the Arrow-Debreu portfolio model to consumption externalities. It is assumed that each investor has a von Neumann-Morgenstern utility that is a function of her own consumption and of the average consumption in the group to which she belongs. Individual degrees of risk aversion and conformism are heterogeneous within each group and between the different groups in the economy. We show that, under some conditions on the degree of conformism in the economy, the optimal portfolio and consumption choices observed at equilibrium in each group with consumption externalities are equivalent to those that are optimal without any externality, but with an adjusted degree of risk aversion. If these conditions are not fulfilled, groups have no representative agent and the demand for pure zero-mean lotteries may be positive, thereby showing that not all diversifiable risks are washed away at equilibrium. We characterize the relationship between the distribution of conformism in the economy to the competitive allocation of risk and to the equity premium. We provide conditions for the two-fund separation property to hold.

Suggested Citation

Gollier, Christian, Misery Loves Company: Equilibrium Portfolios with Heterogeneous Consumption Externalities. International Economic Review, Vol. 45, No. 4, pp. 1169-1192, November 2004. Available at SSRN: https://ssrn.com/abstract=608483

Christian Gollier (Contact Author)

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France
+33 61 12 86 30 (Phone)
+33 61 12 86 37 (Fax)

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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