IDEAS home Printed from https://ideas.repec.org/a/eee/finlet/v59y2024ics1544612323010826.html
   My bibliography  Save this article

Do social networks affect household financial vulnerability? Evidence from China

Author

Listed:
  • Chen, Bo
  • Zeng, Ning
  • Tam, Kwo Ping

Abstract

Using data from China Family Panel Studies (CFPS) in 2018, we first examine the impact of social networks on household financial vulnerability and find that social networks significantly reduce the probability of household financial vulnerability. In particular, we find that there is a noticeably larger mitigating effect of social networks on household financial vulnerability among households with higher indebtedness. We also find that social networks can reduce household financial vulnerability, regardless of whether households have commercial insurance or not. Further, we investigate how social networks affect household financial vulnerability. Evidence suggests that social networks can mitigate household financial vulnerability by encouraging informal debt from family or friends and improving financial literacy. Our empirical results are still robust when we address the potential endogeneity problem arising from social networks.

Suggested Citation

  • Chen, Bo & Zeng, Ning & Tam, Kwo Ping, 2024. "Do social networks affect household financial vulnerability? Evidence from China," Finance Research Letters, Elsevier, vol. 59(C).
    • Handle: RePEc:eee:finlet:v:59:y:2024:i:c:s1544612323010826
    DOI: 10.1016/j.frl.2023.104710
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1544612323010826
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.frl.2023.104710?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. De Weerdt, Joachim & Dercon, Stefan, 2006. "Risk-sharing networks and insurance against illness," Journal of Development Economics, Elsevier, vol. 81(2), pages 337-356, December.
    2. repec:dau:papers:123456789/10840 is not listed on IDEAS
    3. Tullio Jappelli & Marco Pagano & Marco Di Maggio, 2013. "Households' indebtedness and financial fragility," Journal of Financial Management, Markets and Institutions, Società editrice il Mulino, issue 1, pages 23-46, January.
    4. Hu, Debao & Zhai, Chenzhe & Yan, Zhen, 2023. "Do social interactions foster household entrepreneurship? Evidence from online and offline data from China Family Panel Studies," China Economic Review, Elsevier, vol. 79(C).
    5. Kotlikoff, Laurence J & Spivak, Avia, 1981. "The Family as an Incomplete Annuities Market," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 372-391, April.
    6. Feigenberg, Benjamin & Field, Erica M. & Pande, Rohini, 2010. "Building Social Capital through Microfinance," Working Paper Series rwp10-019, Harvard University, John F. Kennedy School of Government.
    7. Annamaria Lusardi & Daniel Schneider & Peter Tufano, 2011. "Financially Fragile Households: Evidence and Implications," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(1 (Spring), pages 83-150.
    8. Shi, Xiaojun & Wang, Hung-Jen & Xing, Chunbing, 2015. "The role of life insurance in an emerging economy: Human capital protection, assets allocation and social interaction," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 19-33.
    9. Zhou, Weina, 2014. "Brothers, household financial markets and savings rate in China," Journal of Development Economics, Elsevier, vol. 111(C), pages 34-47.
    10. F. Pericoli & E. Pierucci & L. Ventura, 2015. "The impact of social capital on consumption insurance and income volatility in the UK: evidence from the British Household Panel Survey," Review of Economics of the Household, Springer, vol. 13(2), pages 269-295, June.
    11. Attila Ambrus & Markus Mobius & Adam Szeidl, 2014. "Consumption Risk-Sharing in Social Networks," American Economic Review, American Economic Association, vol. 104(1), pages 149-182, January.
    12. Graziella Bertocchi & Marianna Brunetti & Anzelika Zaiceva, 2023. "The Financial Decisions of Immigrant and Native Households: Evidence from Italy," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 9(1), pages 117-174, March.
    13. Lei He & Shuyi Zhou, 2022. "Household Financial Vulnerability to Income and Medical Expenditure Shocks: Measurement and Determinants," IJERPH, MDPI, vol. 19(8), pages 1-17, April.
    14. Rasmus Heltberg & Niels Lund, 2009. "Shocks, Coping, and Outcomes for Pakistan's Poor: Health Risks Predominate," Journal of Development Studies, Taylor & Francis Journals, vol. 45(6), pages 889-910.
    15. Li, Qize & Brounen, Dirk & Li, Jianjun & Wei, Xu, 2022. "Social interactions and Chinese households’ participation in the risky financial market," Finance Research Letters, Elsevier, vol. 49(C).
    16. Glenn Ellison & Drew Fudenberg, 1995. "Word-of-Mouth Communication and Social Learning," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(1), pages 93-125.
    17. Marianna Brunetti & Elena Giarda & Costanza Torricelli, 2016. "Is Financial Fragility a Matter of Illiquidity? An Appraisal for Italian Households," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 62(4), pages 628-649, December.
    18. Marianna Brunetti & Elena Giarda & Costanza Torricelli, 2020. "Financial fragility across Europe and the US: The role of portfolio choices, household features and economic-institutional setup," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0081, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    19. Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-172, March.
    20. Liang, Pinghan & Guo, Shiqi, 2015. "Social interaction, Internet access and stock market participation—An empirical study in China," Journal of Comparative Economics, Elsevier, vol. 43(4), pages 883-901.
    21. Sarah Brown & Karl Taylor, 2008. "Household debt and financial assets: evidence from Germany, Great Britain and the USA," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 171(3), pages 615-643, June.
    22. Ye, Xiang & Yue, Pengpeng, 2023. "Financial literacy and household energy efficiency: An analysis of credit market and supply chain," Finance Research Letters, Elsevier, vol. 52(C).
    23. Christopher Udry, 1994. "Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 61(3), pages 495-526.
    24. Jeffrey R. Brown & Zoran Ivković & Paul A. Smith & Scott Weisbenner, 2008. "Neighbors Matter: Causal Community Effects and Stock Market Participation," Journal of Finance, American Finance Association, vol. 63(3), pages 1509-1531, June.
    25. Ingela Alger & Jörgen W. Weibull, 2010. "Kinship, Incentives, and Evolution," American Economic Review, American Economic Association, vol. 100(4), pages 1725-1758, September.
    26. Banerjee, Abhijit & Jackson, Matthew O. & Duflo, Esther & Chandrasekhar, Arun G., 2012. "The Diffusion of Microfinance," CEPR Discussion Papers 8770, C.E.P.R. Discussion Papers.
    27. Fafchamps, Marcel & Gubert, Flore, 2007. "The formation of risk sharing networks," Journal of Development Economics, Elsevier, vol. 83(2), pages 326-350, July.
    28. Marcel Fafchamps & Flore Gubert, 2007. "Risk Sharing and Network Formation," American Economic Review, American Economic Association, vol. 97(2), pages 75-79, May.
    29. Fafchamps, Marcel & Lund, Susan, 2003. "Risk-sharing networks in rural Philippines," Journal of Development Economics, Elsevier, vol. 71(2), pages 261-287, August.
    30. Liaqat Ali & Muhammad Kamran Naqi Khan & Habib Ahmad, 2020. "Financial Fragility of Pakistani Household," Journal of Family and Economic Issues, Springer, vol. 41(3), pages 572-590, September.
    31. Liaqat Ali & Muhammad Kamran Naqi Khan & Habib Ahmad, 2020. "Education of the Head and Financial Vulnerability of Households: Evidence from a Household’s Survey Data in Pakistan," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 147(2), pages 439-463, January.
    32. Mobarak, A. Mushfiq & Rosenzweig, Mark R., 2012. "Selling formal Insurance to the Informally Insured," Center Discussion Papers 121671, Yale University, Economic Growth Center.
    33. repec:bla:jfinan:v:59:y:2004:i:1:p:137-163 is not listed on IDEAS
    34. Niu, Geng & Wang, Qi & Li, Han & Zhou, Yang, 2020. "Number of brothers, risk sharing, and stock market participation," Journal of Banking & Finance, Elsevier, vol. 113(C).
    35. John Knight & Linda Yueh, 2008. "The role of social capital in the labour market in China1," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(3), pages 389-414, July.
    36. Joan Costa-Font, 2010. "Family ties and the crowding out of long-term care insurance," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 26(4), pages 691-712, Winter.
    37. repec:dau:papers:123456789/4392 is not listed on IDEAS
    38. Di Falco, Salvatore & Bulte, Erwin, 2013. "The Impact of Kinship Networks on the Adoption of Risk-Mitigating Strategies in Ethiopia," World Development, Elsevier, vol. 43(C), pages 100-110.
    39. Yann Bramoullé & Rachel Kranton, 2007. "Risk Sharing Across Communities," American Economic Review, American Economic Association, vol. 97(2), pages 70-74, May.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Shi, Xiaojun & Du, Baorui, 2024. "Decomposition of social networks and household purchase of insurance as knowledge products," Research in International Business and Finance, Elsevier, vol. 69(C).
    2. Jain, Prachi, 2020. "Imperfect monitoring and informal insurance: The role of social ties," Journal of Economic Behavior & Organization, Elsevier, vol. 180(C), pages 241-256.
    3. Jackson, Matthew O. & Zenou, Yves, 2015. "Games on Networks," Handbook of Game Theory with Economic Applications,, Elsevier.
    4. Belhaj, Mohamed & Deroïan, Frédéric, 2012. "Risk taking under heterogenous revenue sharing," Journal of Development Economics, Elsevier, vol. 98(2), pages 192-202.
    5. Gulesci,Selim, 2020. "Poverty Alleviation and Interhousehold Transfers : Evidence from BRAC's Graduation Program in Bangladesh," Policy Research Working Paper Series 9467, The World Bank.
    6. Islam, Asad & Nguyen, Chau, 2018. "Do networks matter after a natural disaster? A study of resource sharing within an informal network after Cyclone Aila," Journal of Environmental Economics and Management, Elsevier, vol. 90(C), pages 249-268.
    7. F. Pericoli & E. Pierucci & L. Ventura, 2015. "The impact of social capital on consumption insurance and income volatility in the UK: evidence from the British Household Panel Survey," Review of Economics of the Household, Springer, vol. 13(2), pages 269-295, June.
    8. Gathergood, John & Wylie, Daniel, 2018. "Why are some households so poorly insured?," Journal of Economic Behavior & Organization, Elsevier, vol. 156(C), pages 1-12.
    9. E Lance Howe & James J Murphy & Drew Gerkey & Colin Thor West, 2016. "Indirect Reciprocity, Resource Sharing, and Environmental Risk: Evidence from Field Experiments in Siberia," PLOS ONE, Public Library of Science, vol. 11(7), pages 1-17, July.
    10. Geng, Xin & Ide, Vera & Janssens, Wendy & Kramer, Berber & van der List, Marijn, 2017. "Health insurance, a friend in need? Evidence from financial and health diaries in Kenya," IFPRI discussion papers 1664, International Food Policy Research Institute (IFPRI).
    11. Xiaoyu Wu & Jianmei Zhao, 2020. "Risk sharing, siblings, and household equity investment: evidence from urban China," Journal of Population Economics, Springer;European Society for Population Economics, vol. 33(2), pages 461-482, April.
    12. Attila Ambrus & Markus Mobius & Adam Szeidl, 2014. "Consumption Risk-Sharing in Social Networks," American Economic Review, American Economic Association, vol. 104(1), pages 149-182, January.
    13. Ethan Ligon & Laura Schechter, 2020. "Structural Experimentation to Distinguish between Models of Risk Sharing with Frictions in Rural Paraguay," Economic Development and Cultural Change, University of Chicago Press, vol. 69(1), pages 1-50.
    14. Pauline Castaing, 2020. "Joint liability and adaptation to climate change: evidence from Burkinabe cooperatives," Post-Print hal-02942129, HAL.
    15. Digvijay S. Negi & Christopher B. Barrett, 2024. "Consumption Smoothing, Commodity Markets, and Informal Transfers," Working Papers 116, Ashoka University, Department of Economics.
    16. Heath Henderson & Arnob Alam, 2022. "The structure of risk-sharing networks," Empirical Economics, Springer, vol. 62(2), pages 853-886, February.
    17. Bryan S. Graham, 2019. "Network Data," CeMMAP working papers CWP71/19, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    18. Geng, Xin & Janssens, Wendy & Kramer, Berber & van der List, Marijn, 2018. "Health insurance, a friend in need? Impacts of formal insurance and crowding out of informal insurance," World Development, Elsevier, vol. 111(C), pages 196-210.
    19. Lee Cronk & Athena Aktipis, 2021. "Design principles for risk-pooling systems," Nature Human Behaviour, Nature, vol. 5(7), pages 825-833, July.
    20. Renaud Bourlès & Yann Bramoullé & Eduardo Perez‐Richet, 2017. "Altruism in Networks," Econometrica, Econometric Society, vol. 85, pages 675-689, March.

    More about this item

    Keywords

    Financial vulnerability; Financial literacy; Household finance; Social networks; Informal risk sharing;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:finlet:v:59:y:2024:i:c:s1544612323010826. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/frl .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.