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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.

Suggested Citation

  • Diego García & Günter Strobl, 2011. "Relative Wealth Concerns and Complementarities in Information Acquisition," Review of Financial Studies, Society for Financial Studies, vol. 24(1), pages 169-207.
  • Handle: RePEc:oup:rfinst:v:24:y:2011:i:1:p:169-207
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    File URL: http://hdl.handle.net/10.1093/rfs/hhq086
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    1. repec:oup:restud:v:82:y:2015:i:4:p:1533-1567. is not listed on IDEAS
    2. repec:oup:jeurec:v:15:y:2017:i:4:p:877-909. is not listed on IDEAS
    3. Mohammad Davoodalhosseini, 2018. "Adverse Selection with Heterogeneously Informed Agents," Staff Working Papers 18-7, Bank of Canada.
    4. Antonio Mele & Francesco Sangiorgi, 2009. "Ambiguity, Information Acquisition and Price Swings in Asset Markets," FMG Discussion Papers dp633, Financial Markets Group.
    5. Curatola, Giuliano, 2016. "Preference evolution and the dynamics of capital markets," SAFE Working Paper Series 128, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    6. repec:kap:sbusec:v:50:y:2018:i:2:d:10.1007_s11187-016-9834-6 is not listed on IDEAS
    7. Larson, Nathan, 2011. "Clustering on the same news sources in an asset market," MPRA Paper 32823, University Library of Munich, Germany.
    8. 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.
    9. 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.
    10. Liyan Yang & Itay Goldstein, 2012. "Information Diversity and Market Efficiency Spirals," 2012 Meeting Papers 349, Society for Economic Dynamics.
    11. Levy, Moshe & Levy, Haim, 2015. "Keeping up with the Joneses and optimal diversification," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 29-38.
    12. Matthijs Breugem & Adrian Buss, 2017. "Institutional Investors and Information Acquisition: Implications for Asset Prices and Informational Efficiency," NBER Working Papers 23561, National Bureau of Economic Research, Inc.
    13. Avdis, Efstathios, 2016. "Information tradeoffs in dynamic financial markets," Journal of Financial Economics, Elsevier, vol. 122(3), pages 568-584.
    14. repec:eee:jeborg:v:140:y:2017:i:c:p:197-223 is not listed on IDEAS
    15. García, Diego & Norli, Øyvind, 2012. "Geographic dispersion and stock returns," Journal of Financial Economics, Elsevier, vol. 106(3), pages 547-565.
    16. Manela, Asaf, 2014. "The value of diffusing information," Journal of Financial Economics, Elsevier, vol. 111(1), pages 181-199.
    17. Curatola, Giuliano & Dergunov, Ilya, 2017. "International capital markets with time-varying preferences," SAFE Working Paper Series 176, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.

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