Investment and concern for relative position

Part of the Studies in Economic Design book series (DESI)


Economists typically analyze individuals’ market behavior in isolation from their nonmarket decisions. While this research strategy has generally been successful, it can lead to systematic errors when agents’ nonmarket behavior affects their market choices. In this paper we analyze how individuals’ investment behavior changes as a result of nonmarket behavior. Specifically, we analyze a model in which individuals must decide how to allocate their initial endowment between two random investments, where the returns are perfectly correlated across individuals for the first investment but independent across individuals for the second. We consider an environment in which men and women match, with wealthier individuals more successful in matching. We show how individuals’ concern about relative wealth can affect their investment decisions, and we provide conditions under which individuals bias their investments either toward or away from the investment with correlated returns. A modification of the model is used to explain why agents’ investments might exhibit a home country bias.


Utility Function Investment Decision Symmetric Equilibrium Wealth Distribution Interior Equilibrium 
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Copyright information

© Springer-Verlag Berlin Heidelberg 2003

Authors and Affiliations

  1. 1.Research DepartmentFederal Reserve Bank of MinneapolisMinneapolisUSA
  2. 2.Department of EconomicsBunche Hall 9377, UCLALos AngelesUSA
  3. 3.Department of Economics3718 Locust Walk, University of PennsylvaniaPhiladelphiaUSA

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