Social Interaction and Stock-Market Participation
Jeffrey D. Kubik
Syracuse University - Department of Economics
Harrison G. Hong
Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)
Jeremy C. Stein
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
NBER Working Paper No. W8358
We investigate the idea that stock-market participation is influenced by social interaction. We build a simple model in which any given 'social' investor finds it more attractive to invest in the market when the participation rate among his peers is higher. The model predicts higher participation rates among social investors than among 'non-socials'. It also admits the possibility of multiple social equilibria. We then test the theory using data from the Health and Retirement Study. Social households - defined as those who interact with their neighbors, or who attend church - are indeed substantially more likely to invest in the stock market than non-social households, controlling for other factors like wealth, race, education and risk tolerance. Moreover, consistent with a peer-effects story, the impact of sociability is stronger in states where stock-market participation rates are higher.
Number of Pages in PDF File: 48
JEL Classification: G1,E4
Date posted: June 28, 2001
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