Relative Wealth Concerns and Complementarities in Information Acquisition

Review of Financial Studies, 2011, Vol. 24 (1), pp. 169-207 (with Diego Garcia).

This paper 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.

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