Does Finance Make Us Less Social?
51 Pages Posted: 22 Aug 2018 Last revised: 25 Sep 2019
Date Written: September 24, 2019
Informal risk sharing within social networks and formal financial contracts both enable households to manage risk. Does the use of a financial contract to manage risk affect household participation in social networks? Yes. By subsidizing crop insurance, the Federal Crop Insurance Reform Act of 1994 doubled the use of crop insurance nationally within a year although changes in the use of this financial contract varied substantially across counties. Our main finding is that increased crop insurance usage decreased the number of religious adherents and the size of church congregations. Difference-in-Difference tests, with urban counties as a control group, and Spatial First Difference tests, with neighboring counties as a control group, both confirm that households substituted crop insurance for religiosity. In addition, consistent with moral hazard, increases in crop insurance usage decreased precautionary savings, crop diversification, and crop yields.
Keywords: Household Risk, Social Networks, Financial Contracts
JEL Classification: G2, G5, G52
Suggested Citation: Suggested Citation