DP9238 Household Debt and Social Interactions

Author(s): Dimitris Georgarakos, Michael Haliassos, Giacomo Pasini
Publication Date: December 2012
Keyword(s): consumer credit, household debt, Household finance, informal loans, mortgages, social interactions
JEL(s): E21, G11
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9238

Debt-induced crises, including the subprime crisis, are usually attributed exclusively to supply-side factors. We examine the role of social influences on debt culture, emanating from perceived average income of peers. Utilizing unique information from a household survey, representative of the Dutch population, that circumvents the issue of defining the social circle, we consider collateralized, consumer, and informal loans. We find robust social effects on borrowing - especially among those who consider themselves poorer than their peers - and on indebtedness, suggesting a link to financial distress. We employ a number of approaches to rule out spurious associations and to handle correlated effects.