The Economic Effects of Social Networks: Evidence from the Housing Market

Abstract

We show how data from online social networking services can help researchers better understand the effects of social interactions on economic decision making. We use anonymized data from Facebook, the world's largest online social network, to first explore heterogeneity in the structure of individuals' social networks. We then exploit the rich variation in the data to analyze the effects of social interactions on housing market investments. To do this, we combine the social network information with housing transaction data. Variation in the geographic dispersion of social networks, combined with time-varying regional house price changes, induces heterogeneity in the house price experiences of different individuals' friends. We show that individuals whose geographically distant friends experienced larger recent house price increases are more likely to transition from renting to owning. They also buy larger houses and pay more for a given house. Similarly, when homeowners' friends experience less positive house price changes, these homeowners are more likely to become renters, and more likely to sell their property at a lower price. We find that these relationships are driven by the effect of social interactions on individuals' housing market expectations. Survey data show that individuals whose geographically distant friends experienced larger recent house price increases consider local property a more attractive investment, with bigger effects for individuals who regularly discuss such investments with their friends.

Keywords: Social Networks, Expectation Formation, Disagreement, House Price Dynamics

JEL Classification: G12, D12, D14, D84, R21