Social Ties and the Demand for Financial Services

• Published in: Journal of financial services research Vol. 52; no. 1-2; pp. 35 - 88
• Main Authors: Patacchini, Eleonora, Rainone, Edoardo
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.10.2017; Springer Nature B.V
• Subjects: Decision making; Economics and Finance; Endogenous; Finance; Financial Services; Influence; Macroeconomics/Monetary Economics//Financial Economics; Peer relationships; Social interaction; Social networks; Young adults; Financial literacy; C31; D85; Network formation; Bayesian estimation; C11; D14; G11; E45; M31; Endogeneity; Trust; D1; Social interactions; Financial market participation; D81
• ISSN: 0920-8550; 1573-0735
• DOI: 10.1007/s10693-017-0279-0

This paper studies the importance of social interactions for the adoption of financial services among young adults. Specifically, we investigate whether, how, and why financial decisions among interacting agents are correlated. We exploit a unique dataset of friendship networks in the United States and a novel estimation strategy that accounts for possibly endogenous network formation. We find that not all social contacts are equally important: only long-lasting relationships influence financial decisions. Moreover, this peer influence exists only in cohesive social structures. This evidence is consistent with an important role of trust in financial decisions. When agents consider whether or not to adopt a financial instrument, they face a risk and may place greater value on information coming from agents they trust. These results can help explain the importance of face-to-face social contacts for financial decisions.