Social Finance

We review an empirical literature that studies the role of social interactions in driving economic and financial decision-making. We first summarize recent work that documents an important role of social interactions in explaining household decisions in housing and mortgage markets. This evidence shows, for example, that there are large peer effects in mortgage refinancing decisions and that individuals’ beliefs about the attractiveness of housing market investments are affected by the recent house price experiences of their friends. We also summarize recent work showing that social interactions affect the stock market investments of both retail and professional investors as well as household financial decisions such as retirement savings, borrowing, and default. Along the way, we describe a number of easily accessible recent data sets for the study of social interactions in finance, including the Social Connectedness Index, which measures the frequency of Facebook friendship links across geographies. We conclude by outlining several promising directions for further research in the field of social finance. Expected final online publication date for the Annual Review of Financial Economics, Volume 13 is March 2021. Please see http://www.annualreviews.org/page/journal/pubdates for revised estimates.

Race, Real Estate, and Responsiveness

In this chapter, I empirically trace the state of Black homeownership over the course of the Obama presidency in comparison to other groups. I look at homeownership, foreclosure, and mortgage refinancing rates by race, in addition to residential segregation patterns. I also discuss policies that the Obama administration initiated to help struggling homeowners and reduce residential segregation. Studying homeownership and residential segregation policies in the Obama administration is important because it contributes to the larger debate about what President Obama did for Blacks while in office. We can see if President Obama was quietly advocating for Black interests out of the public eye with programs. This may have been his effort at avoiding what the editors of this volume call the “inclusionary dilemma” of Black politicians attempting to include Black interests within often racially hostile American policy regimes. Now that President Obama’s successor, Donald Trump, has had enough time to put his own stamp on housing policy, we have the advantage of being able to compare the different approaches to and motivations behind particular housing policies. This chapter ends with a brief discussion of how President Obama’s housing policies—the Obama housing legacy—have fared under the Trump administration.

Sources of Inaction in Household Finance: Evidence from the Danish Mortgage Market

We build an empirical model to attribute delays in mortgage refinancing to psychological costs inhibiting refinancing until incentives are sufficiently strong; and behavior, potentially attributable to information-gathering costs, lowering the probability of household refinancing per unit time at any incentive. We estimate the model on administrative panel data from Denmark, where mortgage refinancing without cash-out is unconstrained. Middle-aged and wealthy households act as if they have high psychological refinancing costs; but older, poorer, and less-educated households refinance with lower probability irrespective of incentives, thereby achieving lower savings. We use the model to understand frictions in the mortgage channel of monetary policy transmission. (JEL E52, G21, G51, R31)