Household Debt and Social Interactions

Abstract:     
Debt-induced crises, including the subprime, are usually attributed exclusively to supply-side factors. We uncover an additional factor contributing to debt culture, namely social influences emanating from the perceived average income of peers. Using unique information from a representative household survey of the Dutch population that circumvents the need to define 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 check the robustness of our results using several approaches to rule out spurious associations and handle correlated effects.

Number of Pages in PDF File: 46

Keywords: Household finance, household debt, social interactions, mortgages, consumer credit, informal loans

JEL Classification: G11, E21

working papers series