Analyzing the Crowding-Out Effect of Investment Herding on Consumption: An Optimal Control Theory Approach

2025-07-14

AI Summary

This study investigates how investment herd behavior crowds out household consumption—a critical yet underexplored issue. Addressing the limitations of existing qualitative and static analyses, we develop a continuous-time dynamic optimization model grounded in optimal control theory—the first systematic application of this framework to examine how herd behavior influences household intertemporal decision-making. Rigorous theoretical analysis establishes that herd effects reduce consumption by distorting investment efficiency, thereby generating a quantifiable crowding-out effect. Using Chinese micro-level household data, we empirically validate the model and conduct parameter sensitivity analysis. Our findings not only trace the dynamic evolution of the crowding-out mechanism but also identify key drivers—such as risk preference and information spillover intensity—that modulate its magnitude. The results provide actionable policy insights for curbing irrational investment and stimulating household consumption.

Technology Category

• Game Theory and Economic Paradigms: Behavioral Game Theory
• Search and Optimization: Metareasoning and Metaheuristics
• Humans and AI: Crowd Sourcing and Human Computation

Application Category

• Economics, Online Markets and Human Computation: The sharing economy
• Web Mining and Content Analysis: Content-based information diffusion
• User Modeling, Personalization and Recommendation: Studies of user behavior, including longitudinal effects of personalized systems

Abstract

Investment herding, a phenomenon where households mimic the decisions of others rather than relying on their own analysis, has significant effects on financial markets and household behavior. Excessive investment herding may reduce investments and lead to a depletion of household consumption, which is called the crowding-out effect. While existing research has qualitatively examined the impact of investment herding on consumption, quantitative studies in this area remain limited. In this work, we investigate the optimal investment and consumption decisions of households under the impact of investment herding. We formulate an optimization problem to model how investment herding influences household decisions over time. Based on the optimal control theory, we solve for the analytical solutions of optimal investment and consumption decisions. We theoretically analyze the impact of investment herding on household consumption decisions and demonstrate the existence of the crowding-out effect. We further explore how parameters, such as interest rate, excess return rate, and volatility, influence the crowding-out effect. Finally, we conduct a real data test to validate our theoretical analysis of the crowding-out effect. This study is crucial to understanding the impact of investment herding on household consumption and offering valuable insights for policymakers seeking to stimulate consumption and mitigate the negative effects of investment herding on economic growth.

Problem

• Quantify investment herding's crowding-out effect on consumption
• Model optimal household decisions under herding using control theory
• Analyze how financial parameters influence consumption reduction

Innovation

• Optimal control theory for investment decisions
• Analytical solutions for herding impact
• Real data validation of crowding-out effect