Relative wealth concerns and complementarities in information acquisition

Diego Garcia, Günter Strobl  , - Aug 02, 2023

Working Paper No.   00115-00

This paper studies how relative consumption effects, 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 consumption 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 also generates jumps in asset prices: an infinitesimal shift in fundamentals can lead to a discrete price movement.

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