Did Social Interactions Fuel or Suppress the US Housing Bubble?
30 Pages Posted: 5 Dec 2017 Last revised: 19 Jan 2018
Date Written: January 18, 2018
We study the implications of social interactions for financial markets in which investors exhibit different degrees of sophistication and can influence each other's beliefs through their interaction. We show that social interactions can either increase or decrease the likelihood for a financial bubble, depending on whether unsophisticated or sophisticated investors have greater social influence. We also present empirical evidence consistent with the theoretical framework from the recent housing bubble. We find that sociability promotes more conservative demand for housing and more stable real estate prices, particularly when the number of sophisticated residents in an area is high.
Keywords: Contagion, Bubbles, Real Estate, Financial Literacy, Subprime Mortgages
JEL Classification: D1, G12, G21
Suggested Citation: Suggested Citation