Relative Wealth Concerns and Technology Bubbles

28 Pages Posted: 17 Feb 2005  

Peter M. DeMarzo

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Ilan Kremer

Independent

Date Written: January 16, 2005

Abstract

We develop a stylized general equilibrium model in which technology "bubbles" occur. In our model, agents are able to invest both in a riskless technology and in a risky one. A high risk/reward technology supports over-investment and risk-taking behavior at a rate which is increasing in its risk. When the returns to the risky technology are decreasing in its rate of adoption, we show that investors may over-invest to the point that the expected return of the investment is negative.

In our model, agents care only about their own consumption, but due to competition over some consumption goods, relative wealth considerations arise in equilibrium. Investors' indirect utility function exhibits 'Keeping Up with the Joneses' properties, which may be strong enough to induce herding. We argue that such considerations may explain why the introduction of a new risky technology results in over investment, and in risk-taking behavior which seems to deviate from a rational outcome. Agents over-invest out of the fear of being "left behind" when others are successful.

Keywords: Bubble, technology, relative wealth, Joneses, herding, over-investment

Suggested Citation

DeMarzo, Peter M. and Kaniel, Ron and Kremer, Ilan, Relative Wealth Concerns and Technology Bubbles (January 16, 2005). Available at SSRN: https://ssrn.com/abstract=668137 or http://dx.doi.org/10.2139/ssrn.668137

Peter M. DeMarzo

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-736-1082 (Phone)
650-725-7979 (Fax)

HOME PAGE: http://www.stanford.edu/people/pdemarzo

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ron Kaniel (Contact Author)

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Ilan Kremer

Independent

No Address Available

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