Does Finance Make Us Less Social?

Informal risk sharing within social networks and formal financial contracts both enable households to manage risk. We find that financial contracting reduces participation in social networks. Specifically, increased crop insurance usage decreased local religious adherence and congregation membership in agricultural communities. Our identification utilizes the Federal Crop Insurance Reform Act of 1994 that doubled crop insurance usage nationally within a year, although changes in usage varied across counties. Difference-in-Difference and Spatial First Difference tests confirm that households substituted insurance for religiosity. This substitution was associated with reductions in crop diversification and crop yields, indicating an increase in moral hazard.

Keywords: Household Risk Management, Financial Contracts, Social Networks

JEL Classification: G2, G51, G52

Suggested Citation: Suggested Citation

Cronqvist, Henrik and Warachka, Mitch and Yu, Frank, Does Finance Make Us Less Social? (August 10, 2021). Journal of Financial and Quantitative Analysis (JFQA), forthcoming, Available at SSRN: https://ssrn.com/abstract=3229344 or http://dx.doi.org/10.2139/ssrn.3229344