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The Word on Banking - Social Ties, Trust, and the Adoption of Financial Products

Author

Listed:
  • Eleonora Patacchini

    (Cornell University, EIEF and CEPR)

  • Edoardo Rainone

    (Banca d'Italia and Università di Roma "La Sapienza")

Abstract

This paper studies the importance of social interactions for the adoption of financial products. We exploit a unique dataset of friendships among United States students and a novel estimation strategy that accounts for possibly endogenous network formation. We find that not all social contacts are equally important: only those with a long-lasting relationship influence financial decisions. Moreover, the correlation in agents' behavior only arises among long-lasting ties in cohesive network structures. This evidence is consistent with an important role of trust in financial decisions. Repeated interactions generate trust among agents, which in turn aggregate in tightly knit groups. When agents have to decide whether or not to adopt a financial instrument they face a risk and might place greater value on information coming from agents they trust. These results can help to understand the growing importance of face-to-face social contacts for financial decisions.

Suggested Citation

  • Eleonora Patacchini & Edoardo Rainone, 2014. "The Word on Banking - Social Ties, Trust, and the Adoption of Financial Products," EIEF Working Papers Series 1404, Einaudi Institute for Economics and Finance (EIEF), revised Jul 2014.
    • Handle: RePEc:eie:wpaper:1404
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    References listed on IDEAS

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    Cited by:

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    4. Eleonora Patacchini & Edoardo Rainone, 2017. "Social Ties and the Demand for Financial Services," Journal of Financial Services Research, Springer;Western Finance Association, vol. 52(1), pages 35-88, October.

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