Social Network as Safety Net: The Role of Emotional Support in Avoiding Financial Distress

Abstract

This paper builds on the simple idea that social interactions come with psychological benefits, an element largely ignored in the literature on how social networks shape household financial outcomes. Using microdata from U.S. and Australian household surveys, I document that individuals who lack emotional support are more likely to experience financial hardship. This relationship is not confounded by other forms of support—such as financial assistance, care giving, and advice provision—and is confirmed by between-siblings and within-individual analyses as well as an instrumental variable strategy. Further investigation reveals that emotional support has a preventative effect and a restorative effect: individuals with strong emotional support can better overcome psychological barriers that impede the execution of financial plans; and they can better cope with an adverse shock after its realization as emotional support boosts their confidence.

Keywords: emotional support, financial distress, social networks

JEL Classification: D91, G4, G5