Financial Deepening and Social Capital.

36 Pages Posted: 23 Aug 2011 Last revised: 24 May 2013

See all articles by Francesco Marchionne

Francesco Marchionne

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Università Politecnica delle Marche - Department of Economics

Alberto Niccoli

Università Politecnica delle Marche and MoFiR

Date Written: August 23, 2011

Abstract

This paper provides an alternative interpretation to the financial crisis of 2007-2009 that relies upon “toxic” financial deepening defined as proliferation of financial derivatives. This reduces social capital and trust. The final outcome is that distrust makes financial markets fragile before (and not after) a crisis unveils. Using microeconomic data from Eurobarometer and financial data from the Bank of International Settlements, we test the hypothesis that trust in institutions, our measure of social capital, is negatively affected by the level of global foreign exchange derivatives, our measure of financial deepening. Results are robust for alternative measures of social capital, different sub-periods and country subsamples, and the inclusion of additional financial deepening aspects. The impact has economic relevance, particularly in countries with large financial markets: at current growth rates, financial deepening destroys social capital up to 0.8 percent annually. Financial deepening may lead into the “trap of social capital” with potential negative effects for all economic transactions.

Keywords: trust in institutions, social capital, financial deepening, financial crisis, subprime mortgages

JEL Classification: G01, E02, E44

Suggested Citation

Marchionne, Francesco and Niccoli, Alberto, Financial Deepening and Social Capital. (August 23, 2011). Available at SSRN: https://ssrn.com/abstract=1915198 or http://dx.doi.org/10.2139/ssrn.1915198

Francesco Marchionne (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

1309 East Tenth Street
Bloomington, IN 47405-1701
United States
01 812 855-3756 (Phone)

HOME PAGE: http://kelley.iu.edu/BEPP/Faculty/page14113.cfm?ID=47081

Università Politecnica delle Marche - Department of Economics ( email )

Piazzale Martelli, 8
Ancona, 60121
Italy
+39 071 2207120 (Phone)

Alberto Niccoli

Università Politecnica delle Marche and MoFiR ( email )

Piazzale Martelli, 8
60121 Ancona
Italy

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