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RFS Advance Access originally published online on October 15, 2003
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Rev Fin 2004; 17:879-914
The Review of Financial Studies Vol. 17, No. 3 © 2004 The Society for Financial Studies; all rights reserved.

Wealth, Information Acquisition, and Portfolio Choice

Joël Peress
INSEAD

Address correspondence to Joël Peress, INSEAD, Department of Finance, Boulevard de Constance, 77305 Fontainebleau Cedex, France, or e-mail: joel.peress{at}insead.edu.

I solve (with an approximation) a Grossman-Stiglitz economy under general preferences, thus allowing for wealth effects. Because information generates increasing returns, decreasing absolute risk aversion, in conjunction with the availability of costly information, is sufficient to explain why wealthier households invest a larger fraction of their wealth in risky assets. One no longer needs to resort to decreasing relative risk aversion, an empirically questionable assumption. Furthermore, I show how to distinguish empirically between these two explanations. Finally, I find that the availability of costly information exacerbates wealth inequalities.


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