Social Networks and Household Financial Vulnerability

What is it about?

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.

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Why is it important?

Evidence suggests the following major findings: Social networks significantly reduce the probability of household financial vulnerability. There is a stronger mitigating effect of social networks on household financial vulnerability among households with higher indebtedness. Social networks can reduce household financial vulnerability, regardless of whether households have commercial insurance or not. Social networks can help to mitigate household financial vulnerability by encouraging informal debt from family or friends and by improving financial literacy.