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Relative Wealth Concerns and Complementarities in Information Acquisition

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  • Diego García
  • Günter Strobl

Abstract

This article 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 different communities pursue different information acquisition strategies. This multiplicity of equilibria generates price discontinuities: An infinitesimal shift in fundamentals can lead to a discrete price movement. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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Bibliographic Info

Article provided by Society for Financial Studies in its journal Review of Financial Studies.

Volume (Year): 24 (2011)
Issue (Month): 1 ()
Pages: 169-207

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Handle: RePEc:oup:rfinst:v:24:y:2011:i:1:p:169-207

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Cited by:
  1. Manela, Asaf, 2014. "The value of diffusing information," Journal of Financial Economics, Elsevier, vol. 111(1), pages 181-199.
  2. Larson, Nathan, 2011. "Clustering on the same news sources in an asset market," MPRA Paper 32823, University Library of Munich, Germany.
  3. Niu, Zilong, 2013. "Relative Performance Concerns, Attention Allocation and Complementarities in Information Acquisition," MPRA Paper 51194, University Library of Munich, Germany, revised 02 Nov 2013.
  4. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2013. "Trading frenzies and their impact on real investment," Journal of Financial Economics, Elsevier, vol. 109(2), pages 566-582.
  5. García, Diego & Norli, Øyvind, 2012. "Geographic dispersion and stock returns," Journal of Financial Economics, Elsevier, vol. 106(3), pages 547-565.
  6. Liyan Yang & Itay Goldstein, 2012. "Information Diversity and Market Efficiency Spirals," 2012 Meeting Papers 349, Society for Economic Dynamics.

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