| Abstract: | We present a rational general equilibrium model that highlightsthe fact that relative wealth concerns can play a role in explainingfinancial bubbles. We consider a finite-horizon overlappinggenerations model in which agents care only about their consumption.Though the horizon is finite, competition over future investmentopportunities makes agents' utilities dependent on the wealthof their cohort and induces relative wealth concerns. Agentsherd into risky securities and drive down their expected return.Even though the bubble is likely to burst and lead to a substantialloss, agents' relative wealth concerns make them afraid to tradeagainst the crowd. |
