The Value of Connections: Network Effects on Stock Market Participation

Abstract

We introduce an equilibrium model of the stock market participation rate with a social network. We study how information sharing through a network affects the decision to enter the stock market and how social connectivity interacts with individual income and financial literacy to create heterogeneity in stock market participation levels. We analyze how the equilibrium participation level depends on the intensity of social interactions, and provide an algorithm for finding the equilibrium stock market participation level. We test the predictions from the model using Facebook county-level connectivity data. We find the model with social networks outperforms standard models without networks in predicting heterogeneity of equilibrium stock market participation over the income distribution, explaining non-participation among wealthy agents.

Keywords: Social networks; Peer effects; Stock Market Participation

JEL Classification: D14, D85, G11