Market selection with learning and catching up with the Joneses

Abstract

We study natural selection in complete financial markets, populated by heterogeneous agents. We allow for a rich structure of heterogeneity: Individuals may differ in their beliefs concerning the economy, information and learning mechanism, risk aversion, impatience (time preference rate) and degree of habits. We develop new techniques for studying long run behavior of such economies, based on the Strassen's functional law of iterated logarithm. In particular, we explicitly determine an agent's survival index and show how the latter depends on the agent's characteristics. We use these results to study the long run behavior of the equilibrium interest rate and the market price of risk.