TY - JOUR
T1 - Diversification as a public good
T2 - Community effects in portfolio choice
AU - DeMarzo, Peter M.
AU - Kaniel, Ron
AU - Kremer, Ilan
PY - 2004/8
Y1 - 2004/8
N2 - Within a rational general equilibrium model in which agents care only about personal consumption, we consider a setting in which, due to borrowing constraints, individuals endowed with local resources underparticipate in financial markets. As a result, investors compete for local resources through their portfolio choices. Even with complete financial markets and no aggregate risk, agents may herd into risky portfolios. This yields a Pareto-dominated outcome as agents introduce "community" risk unrelated to fundamentals. Moreover, if some agents are behaviorally biased, or cannot completely diversify their holdings, rational agents may choose more extreme portfolios and amplify the effect.
AB - Within a rational general equilibrium model in which agents care only about personal consumption, we consider a setting in which, due to borrowing constraints, individuals endowed with local resources underparticipate in financial markets. As a result, investors compete for local resources through their portfolio choices. Even with complete financial markets and no aggregate risk, agents may herd into risky portfolios. This yields a Pareto-dominated outcome as agents introduce "community" risk unrelated to fundamentals. Moreover, if some agents are behaviorally biased, or cannot completely diversify their holdings, rational agents may choose more extreme portfolios and amplify the effect.
UR - http://www.scopus.com/inward/record.url?scp=4344713175&partnerID=8YFLogxK
U2 - 10.1111/j.1540-6261.2004.00676.x
DO - 10.1111/j.1540-6261.2004.00676.x
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AN - SCOPUS:4344713175
SN - 0022-1082
VL - 59
SP - 1677
EP - 1716
JO - Journal of Finance
JF - Journal of Finance
IS - 4
ER -