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The impact of a reference point determined by social comparison on wealth growth and inequality

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  • Lou, Youcheng
  • Strub, Moris S.
  • Li, Duan
  • Wang, Shouyang

Abstract

We study the impact of a reference point determined by social comparison on wealth growth and inequality. The reference point of each individual investor contains both personal and social components. Whereas the personal component depends on the investor’s own history of wealth, the social component is determined by the wealth level of other investors in her network. In the benchmark case without social interactions and under the assumption of homogeneous preferences, each investor’s expected wealth grows at a common rate, the wealth gaps widens and the Gini coefficient remains constant. On the other hand, if the reference point is determined solely by social interactions, then it is possible that the network simultaneously experiences high wealth growth and a reduction in inequality. Finally, for the general case where the reference point incorporates both personal and social components and some extensions of the model, we numerically show that increasing the degree of social interactions is beneficial for both increasing wealth growth and reducing inequality.

Suggested Citation

  • Lou, Youcheng & Strub, Moris S. & Li, Duan & Wang, Shouyang, 2021. "The impact of a reference point determined by social comparison on wealth growth and inequality," Journal of Economic Dynamics and Control, Elsevier, vol. 127(C).
  • Handle: RePEc:eee:dyncon:v:127:y:2021:i:c:s0165188921000555
    DOI: 10.1016/j.jedc.2021.104120
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    More about this item

    Keywords

    Behavioral finance; Reference point; Social interactions; Wealth growth; Inequality;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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