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Misery Loves Company: Equilibrium Portfolios With Heterogeneous Consumption Externalities

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  • Christian Gollier

Abstract

The present article extends the Arrow-Debreu portfolio model to consumption externalities. It is assumed that each investor has a von Neumann-Morgenstern utility that is a function of her own consumption and of the average consumption in the group to which she belongs. Individual degrees of risk aversion and conformism are heterogeneous within each group and between the different groups in the economy. We show that, under some conditions on the degree of conformism in the economy, the optimal portfolio and consumption choices observed at equilibrium in each group with consumption externalities are equivalent to those that are optimal without any externality, but with an adjusted degree of risk aversion. If these conditions are not fulfilled, groups have no representative agent and the demand for pure zero-mean lotteries may be positive, thereby showing that not all diversifiable risks are washed away at equilibrium. We characterize the relationship between the distribution of conformism in the economy to the competitive allocation of risk and to the equity premium. We provide conditions for the two-fund separation property to hold. Copyright 2004 by the Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association.

Suggested Citation

  • Christian Gollier, 2004. "Misery Loves Company: Equilibrium Portfolios With Heterogeneous Consumption Externalities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(4), pages 1169-1192, November.
    • Handle: RePEc:ier:iecrev:v:45:y:2004:i:4:p:1169-1192
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    Cited by:

    1. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2019. "The fight-or-flight response to the Joneses and inequality," Journal of Economic Dynamics and Control, Elsevier, vol. 101(C), pages 187-210.
    2. Kazuo Mino & Yasuhiro Nakamoto, 2016. "Heterogeneous conformism and wealth distribution in a neoclassical growth model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(4), pages 689-717, October.
    3. Boaz Moselle & François Degeorge & Richard Zeckhauser, 2007. "Conspicuous conservatism in risk choice," Journal of Risk and Uncertainty, Springer, vol. 35(1), pages 1-16, August.
    4. Takeo Hori & Masako Ikefuji & Kazuo Mino, 2015. "Conformism And Structural Change," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 56(3), pages 939-961, August.
    5. Curatola, Giuliano, 2017. "Portfolio choice and asset prices when preferences are interdependent," Journal of Economic Behavior & Organization, Elsevier, vol. 140(C), pages 197-223.
    6. Barnett, Richard C. & Bhattacharya, Joydeep & Bunzel, Helle, 2018. "The Fight-or-Flight Response to the Joneses and Income Inequality," ISU General Staff Papers 201812120800001060, Iowa State University, Department of Economics.
    7. Oded STARK & Krzysztof SZCZYGIELSKI, 2019. "The Likelihood of Divorce and the Riskiness of Financial Decisions," JODE - Journal of Demographic Economics, Cambridge University Press, vol. 85(3), pages 209-229, September.
    8. Mino, Kazuo & Nakamoto, Yasuhiro, 2012. "Consumption externalities and equilibrium dynamics with heterogeneous agents," Mathematical Social Sciences, Elsevier, vol. 64(3), pages 225-233.
    9. Kazuo MIno & Yasuhiro Nakamoto, 2014. "Conformism and Wealth Distribution," KIER Working Papers 901, Kyoto University, Institute of Economic Research.
    10. Nikolai Roussanov, 2010. "Diversification and Its Discontents: Idiosyncratic and Entrepreneurial Risk in the Quest for Social Status," Journal of Finance, American Finance Association, vol. 65(5), pages 1755-1788, October.
    11. Nikolai Roussanov & Pavel G. Savor, 2012. "Status, Marriage, and Managers' Attitudes To Risk," NBER Working Papers 17904, National Bureau of Economic Research, Inc.
    12. Kichko, Sergey & Picard, Pierre M., 2021. "Effect of conformism on firm selection, product quality and home bias," Journal of Economic Behavior & Organization, Elsevier, vol. 185(C), pages 402-418.
    13. Kazuo Mino & Yasuhiro Nakamoto, 2009. "Consumption Externalities and Wealth Distribution in a Neoclassical Growth Model," KIER Working Papers 683, Kyoto University, Institute of Economic Research.
    14. Sergey Kichko & Pierre M. Picard, 2018. "Heterogeneity in Conformism, Firm Selection, and Home Bias," DEM Discussion Paper Series 18-09, Department of Economics at the University of Luxembourg.
    15. Barnett, Richard & Bhattacharya, Joydeep & Bunzel, Helle, 2016. "The Fight-or-Flight Response to the Joneses," School of Economics Working Paper Series 2016-12, LeBow College of Business, Drexel University.
    16. Johnson, Timothy C., 2012. "Inequality risk premia," Journal of Monetary Economics, Elsevier, vol. 59(6), pages 565-580.
    17. Curatola, Giuliano, 2016. "Preference evolution and the dynamics of capital markets," SAFE Working Paper Series 128, Leibniz Institute for Financial Research SAFE.
    18. Levy, Moshe & Levy, Haim, 2015. "Keeping up with the Joneses and optimal diversification," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 29-38.
    19. Bruno Solnik & Luo Zuo, 2012. "A Global Equilibrium Asset Pricing Model with Home Preference," Management Science, INFORMS, vol. 58(2), pages 273-292, February.

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