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Portfolio choice when relative income matters

  • Park, Sangkyun
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    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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    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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    1. Peter M. DeMarzo & Ron Kaniel & Ilan Kremer, 2008. "Relative Wealth Concerns and Financial Bubbles," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 19-50, January.
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    12. 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.
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