Beyond Connectivity: Stock Market Participation in a Network

Abstract

The past twenty years have seen an explosion in our ability to share financial information on social networks, yet stock market participation has barely changed. We introduce an equilibrium model of stock market participation with a social network to show that the effect of connectivity on stock market participation depends on how efficient information spreads, which is linked to how agents are connected, homophily and inequality. High-income agents benefit more from connectivity, leading to increased inequality. We discuss the implications for access to financial information, wealth inequality, and stock market participation.

Keywords: Social networks; Peer effects; Stock Market Participation; Connectivity

JEL Classification: D14, D85, G11