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Portfolio choice when relative income matters

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  • Park, Sangkyun
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    Abstract

    This paper derives conditions under which concerns about relative income produce rational herding--the shift of individuals' portfolios into the same direction as others'. To endure the generality of results, the model makes parsimonious behavioral assumptions and no assumption about the functional form of utility. The two most critical conditions are substitutability between one's own income and relative income and diminishing marginal utility of relative income. The keeping-up-with-the-Joneses (KUJ) motive unambiguously contributes to rational herding. When relative income is viewed as a measure of status, however, the KUJ motive is neither a necessary nor a sufficient condition.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics).

    Volume (Year): 38 (2009)
    Issue (Month): 3 (June)
    Pages: 530-533

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    Handle: RePEc:eee:soceco:v:38:y:2009:i:3:p:530-533

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    Web page: http://www.elsevier.com/locate/inca/620175

    Related research

    Keywords: Relative income Asset bubbles Consumption externalities Keeping-up-with-the-Joneses Herding Portfolio choice;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008. "Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," Journal of Economic Literature, American Economic Association, vol. 46(1), pages 95-144, March.
    2. Andrew B. Abel, 1990. "Asset Prices under Habit Formation and Catching up with the Joneses," NBER Working Papers 3279, National Bureau of Economic Research, Inc.
    3. Gary S. Becker & Kevin M. Murphy & Ivan Werning, 2005. "The Equilibrium Distribution of Income and the Market for Status," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(2), pages 282-310, April.
    4. Ferrer-i-Carbonell, Ada, 2005. "Income and well-being: an empirical analysis of the comparison income effect," Journal of Public Economics, Elsevier, vol. 89(5-6), pages 997-1019, June.
    5. Peter M. DeMarzo & Ron Kaniel & Ilan Kremer, 2008. "Relative Wealth Concerns and Financial Bubbles," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 21(1), pages 19-50, January.
    6. Robson, Arthur J, 1992. "Status, the Distribution of Wealth, Private and Social Attitudes to Risk," Econometrica, Econometric Society, Econometric Society, vol. 60(4), pages 837-57, July.
    7. Erzo F. P. Luttmer, 2005. "Neighbors as Negatives: Relative Earnings and Well-Being," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(3), pages 963-1002, August.
    8. J. Solnick, Sara & Hemenway, David, 1998. "Is more always better?: A survey on positional concerns," Journal of Economic Behavior & Organization, Elsevier, vol. 37(3), pages 373-383, November.
    9. Boskin, Michael J & Sheshinski, Eytan, 1978. "Optimal Redistributive Taxation when Individual Welfare Depends upon Relative Income," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 92(4), pages 589-601, November.
    10. Gali, Jordi, 1994. "Keeping Up with the Joneses: Consumption Externalities, Portfolio Choice, and Asset Prices," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 26(1), pages 1-8, February.
    11. Karen K. Lewis, 1999. "Trying to Explain Home Bias in Equities and Consumption," Journal of Economic Literature, American Economic Association, vol. 37(2), pages 571-608, June.
    12. Vendrik, Maarten C.M. & Woltjer, Geert B., 2007. "Happiness and loss aversion: Is utility concave or convex in relative income?," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1423-1448, August.
    13. Yunker, James A, 1983. "Optimal Redistribution with Interdependent Utility Functions: A Simulation Study," Public Finance = Finances publiques, , , vol. 38(1), pages 132-55.
    14. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 56, pages 279.
    15. Yeung Lewis Chan & Leonid Kogan, 2002. "Catching Up with the Joneses: Heterogeneous Preferences and the Dynamics of Asset Prices," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(6), pages 1255-1285, December.
    16. Bill Dupor & Wen-Fang Liu, 2003. "Jealousy and Equilibrium Overconsumption," American Economic Review, American Economic Association, vol. 93(1), pages 423-428, March.
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