International lending by US banks

This paper develops a portfolio choice theory in which the sequential order of decision makers is endogenously determined. We examine investors' choices of either purchasing current information concerning the return on an investment or waiting and later basing their investment on information inferred from the investment decisions of others. Because the quality of that inference increases in the number of investors who purchase information, those with the least to gain from such information-the less wealthy in our context-may find it advantageous to wait and invest later. Thus investors endogenously separate into leaders and followers. Further, the extent of such separation is shown to be related to the persistence in states of the world across time. Some implications of the model are tested using data on :international lending by U.S. banks for the 1982-1994 period. The empirical results support the main predictions of the model.