The Information Rat Race

Information is a valuable good that requires scarce inputs, such as human talent, to produce. Competition among investors for these inputs creates an equilibrium channel that has not yet been modeled explicitly. This paper studies the dynamic implications of this channel for information choice, risk-taking, and welfare. We study a dynamic portfolio choice problem with heterogeneous agents and endogenous information choice. Our central assumption is that investors compete for information in a market for information inputs. This creates a feedback loop in which relatively wealthy agents acquire more information, obtain superior portfolio performance, and get comparatively even wealthier. Two dynamic effects arise: First, interim losers anticipate their inability to acquire future information and take on more risk in an attempt to catch up with interim winners, while interim winners take on less risk to protect their lead. Second, acquiring information is a strategic complement. In addition, we perform a welfare analysis and discuss the model’s implications for capital income inequality and delegated portfolio management.

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