International Lending by U.S. Banks

Abstract

This paper develops a portfolio choice theory in which the sequential order of decision makers is endogenously determined. We examine the decision of investors to purchase current information on returns to particular projects or to wait and later base their actions on information inferred from the decisions of others. Because the quality of that inference increases in the number of investors who purchase information, some investors will find it advantageous to wait and invest later. Thus investors endogenously separate into leaders and followers. We show that the extent of such separation is related to the persistence in states of the world across time. Some implications of the model are tested using data on international lending by US banks for the 1982-1994 period. The empirical results support the main predictions of the model.

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