Diversification as a public good : community effects in portfolio choice

Deskripsi

Within a rational generl equilibrum 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. .Printed Journal