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Social Networks Shape Beliefs and Behavior: Evidence from Social Distancing During the COVID-19 Pandemic

Coauthors: Michael Bailey, Drew Johnston, Martin Koenen, Dominic Russel and Johannes Stroebel

View Abstract

We show that social network exposure to COVID-19 cases shapes individuals' beliefs and behaviors concerning the coronavirus. We use de-identified data from Facebook to document that individuals with friends in areas with worse COVID-19 outbreaks reduce their mobility more than otherwise similar individuals with friends in less affected areas. The effects are quantitatively large and long-lasting: a one standard deviation increase in friend-exposure to COVID-19 cases in March 2020 results in a 1.2 percentage point increase in the probability of staying home on a given day through at least the end of May 2020. As the pandemic progresses—and the characteristics of individuals with the highest friend-exposure vary—changes in friend-exposure continue to drive changes in social distancing behavior, ruling out many unobserved effects as drivers of our results. We also show that individuals with higher friend-exposure to COVID-19 are more likely to publicly post in support of social distancing measures and less likely to be members of groups advocating to "reopen" the economy. These findings suggest that friends can influence individuals' beliefs about the risks of the disease and thereby induce them to engage in mitigating public health behavior.

The Effects of COVID-19 on U.S. Small Businesses: Evidence from Owners, Managers, and Employees

Coauthors: Georgij Alekseev, Safaa Amer, Manasa Gopal, JW Schneider, Johannes Stroebel and Nils Wernerfelt

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We analyze a large-scale survey of owners, managers, and employees of small businesses in the United States to understand the effects of the early stages of the COVID-19 pandemic on those businesses. The survey was fielded in late April 2020 among Facebook business page administrators, frequent sellers on Facebook's e-commerce platform Marketplace, and the general Facebook user population. We observe more than 66,000 responses covering most sectors of the economy, including many businesses that had stopped operating due to the pandemic. The survey asks 136 questions covering topics such as changes in business operations and employment, changes in financing patterns, and the interaction of household and business responsibilities. We characterize the adjustments implemented to survive the pandemic and explore the key challenges to continue operating or to re-open. We show how these patterns differ across industry, firm size, owner gender, and other firm characteristics.

Peer Effects in Product Adoption

Revision requested at the American Economic Journal: Applied Economics

Coauthors: Michael Bailey, Drew Johnston, Johannes Stroebel and Arlene Wong

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VoxEU

LSE Business Review

We study the nature of peer effects in the market for new cell phones. Our analysis builds on de-identified data from Facebook that combine information on social networks with information on users' cell phone models. To identify peer effects, we use variation in friends' new phone acquisitions resulting from random phone losses and carrier-specific contract terms. A new phone purchase by a friend has a substantial positive and long-term effect on an individual's own demand for phones of the same brand, most of which is concentrated on the particular model purchased by the friend. We provide evidence that social learning contributes substantially to the observed peer effects. While peer effects increase the overall demand for cell phones, a friend's purchase of a new phone of a particular brand can reduce individuals' own demand for phones from competing brands---in particular those running on a different operating system. We discuss the implications of these findings for the nature of firm competition. We also find that stronger peer effects are exerted by more price-sensitive individuals. This positive correlation suggests that the elasticity of aggregate demand is substantially larger than the elasticity of individual demand. Through this channel, peer effects reduce firms' markups and, in many models, contribute to higher consumer surplus and more efficient resource allocation.

Social Proximity to Capital: Implications for Investors and Firms

Revision requested at the Review of Financial Studies

Coauthors: Yan Li, Lin Peng, Johannes Stroebel and Dexin Zhou

View Abstract

SCI Data

We use social network data from Facebook to show that institutional investors are more likely to invest in firms from regions to which they have stronger social ties. This effect of social proximity on investment behavior is distinct from the effect of geographic proximity. Social connections have the largest influence on investments of small investors with concentrated holdings as well as on investments in firms with a low market capitalization and little analyst coverage. We also find that the response of investment decisions to social connectedness affects equilibrium capital market outcomes: firms in locations with stronger social ties to places with substantial institutional capital have higher institutional ownership, higher valuations, and higher liquidity. These effects of social proximity to capital on capital market outcomes are largest for small firms with little analyst coverage. We find no evidence that investors generate differential returns from investments in locations to which they are socially connected. Our results suggest that the social structure of regions affects firms' access to capital and contributes to geographic differences in economic outcomes.

Published or Forthcoming Papers

International Trade and Social Connectedness

Journal of International Economics, 129 (103418), March 2021

Coauthors: Mike Bailey, Abhinav Gupta, Sebastian Hillenbrand, Robert Richmond and Johannes Stroebel

View Abstract

SCI Data

We use anonymized data from Facebook to construct a new measure of the pairwise social connectedness between 180 countries and 332 European regions. We find that two countries trade more with each other when they are more socially connected and when they share social connections with a similar set of other countries. The social connections that determine trade in each product are those between the regions where the product is produced in the exporting country and those where it is used in the importing country. Once we control for social connectedness, the estimated effect of geographic distance on trade declines substantially, and the effect of country borders disappears. Our findings suggest that social connectedness increases trade by reducing information asymmetries and by providing a substitute for both trust and formal mechanisms of contract enforcement. We also present evidence against omitted variables and reverse causality as alternative explanations for the observed relationships between social connectedness and trade flows.

The geographic spread of COVID-19 correlates with the structure of social networks as measured by Facebook

Forthcoming at the Journal of Urban Economics

Coauthors: Dominic Russel and Johannes Stroebel

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SCI Data

Guardian

Daily Mail

FAZ

We use anonymized and aggregated data from Facebook to show that areas with stronger social ties to two early COVID-19 "hotspots" (Westchester County, NY, in the U.S. and Lodi province in Italy) generally have more confirmed COVID-19 cases as of March 30, 2020. These relationships hold after controlling for geographic distance to the hotspots as well as for the income and population density of the regions. These results suggest that data from online social networks may prove useful to epidemiologists and others hoping to forecast the spread of communicable diseases such as COVID-19.

Social Finance

Prepared for the Annual Review of Financial Economics

Coauthors: Johannes Stroebel

View Abstract

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 the evidence 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 geographic regions. We conclude by outlining several promising directions for further research at the intersection of household finance "social finance."

The Determinants of Social Connectedness in Europe

Social Informatics 2020

Coauthors: Michael Bailey, Drew Johnston, Dominic Russel, Bogdan State and Johannes Stroebel

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SCI Data

FB Research

We use aggregated data from Facebook to study the structure of social networks across European regions. Social connectedness declines strongly in geographic distance and at country borders. Historical borders and unions — such as the Austro-Hungarian Empire, Czechoslovakia, and East/West Germany — shape present-day social connectedness over and above today’s political boundaries and other controls. All else equal, social connectedness is stronger between regions with residents of similar ages and education levels, as well as between regions that share a language and religion. In contrast, regionpairs with dissimilar incomes tend to be more connected, likely due to increased migration from poorer to richer regions.

Social Connectedness in Urban Areas

Journal of Urban Economics, 118 (103264), July 2020

Coauthors: Michael Bailey, Patrick Farrell, and Theresa Kuchler

View Abstract

[WP Version]

SCI Data

VoxEU

NYU Summary

JR

Wired

Daily Mail

Slate

We use anonymized and aggregated data from Facebook to explore the spatial structure of social networks in the New York metro area. We find that a substantial share of urban residents' connections are to individuals who are located nearby. We also highlight the importance of transportation infrastructure in shaping urban social networks by showing that social connectedness declines faster in travel time and travel cost than it does in geographic distance. We find that areas that are more socially connected with each other have stronger commuting flows, even after controlling for geographic distance and ease of travel. We also document significant heterogeneity in the geographic breadth of social networks across New York zip codes, and show that this heterogeneity correlates with access to public transit. Zip codes with geographically broader social networks also have higher incomes, higher education levels, and more high-quality entrepreneurial activity. We also explore the social connections between New York zip codes and foreign countries, and highlight how these are related to past migration movements.

Sticking To Your Plan: The Role of Present Bias for Credit Card Debt Paydown

Journal of Financial Economics, 139 (2), February 2021

Coauthor: Michaela Pagel

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Using high-frequency transaction-level income, spending, balances, and credit limits data from an online financial service, we show that many consumers fail to stick to their self-set debt paydown plans and argue that this behavior is best explained by a model of present bias. Theoretically, we show that (i) a present-biased agent's sensitivity of consumption spending to paycheck receipt reflects his or her short-run impatience and that (ii) this sensitivity varies with available resources only for agents who are aware (sophisticated) rather than unaware (naive) of their future impatience. In turn, we classify users in our data accordingly. Consistent with present bias, we find that (i) sophisticated users' average paydown falls with higher measured impatience and that (ii) their planned paydown is more predictive of actual paydown than that of naives. We are the first to provide a theoretically-founded empirical methodology to measure sophistication and naivete from spending and income data and to validate this measure using our information on planned versus actual debt paydown. Moreover, our results highlight the importance of distinguishing between sophisticated and naive present-biased individuals in understanding their financial decision making.

House Price Beliefs and Mortgage Leverage Choice

Review of Economic Studies, 86(6), November 2019

Coauthors: Michael Bailey, Eduardo Davila and Johannes Stroebel

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[WP Version]

We study the relationship between homebuyers' beliefs about future house price changes and their mortgage leverage choices. Whether more pessimistic homebuyers choose higher or lower leverage depends on their willingness and ability to reduce the size of their housing market investments. When households primarily maximize the levered return of their property investments, more pessimistic homebuyers reduce their leverage to purchase smaller houses. On the other hand, when considerations such as family size pin down the desired property size, pessimistic homebuyers reduce their financial exposure to the housing market by making smaller downpayments to buy similarly-sized homes. To determine which scenario better describes the data, we investigate the cross-sectional relationship between house price beliefs and mortgage leverage choices in the U.S. housing market. We use plausibly exogenous variation in house price beliefs to show that more pessimistic homebuyers make smaller downpayments and choose higher leverage, in particular in states where default costs are relatively low, as well as during periods when house prices are expected to fall on average. Our results highlight the important role of heterogeneous beliefs in explaining households' financial decisions.

Personal Experiences and Expectations about Aggregate Outcomes

Journal of Finance, 74(5), October 2019

Coauthor: Basit Zafar

View Abstract

Bloomberg

We use novel survey data to document that individuals extrapolate from recent personal experiences when forming expectations about aggregate economic outcomes. Recent locally experienced house price movements affect expectations about future US house price changes, and higher experienced house price volatility causes respondents to report a wider distribution over expected US house price movements. Similarly, we exploit within-individual variation in employment status to show that individuals who personally experience unemployment become more pessimistic about future nationwide unemployment. The extent of extrapolation is unrelated to how informative personal experiences are; it is also inconsistent with risk-adjustment, and more pronounced for less sophisticated individuals.

The Economic Effects of Social Networks: Evidence from the Housing Market

Journal of Political Economy, 126(6), December 2018

Coauthors: Michael Bailey, Ruiqing Cao and Johannes Stroebel

Winner Glucksman Institute Research Prize, 2017

View Abstract

[WP Version]

Appendix

NBER Digest

The Conversation

LSE Business Review

Media Coverage:

CNBC

Citylab

Inman News

We show how data from online social networking services can help researchers better understand the effects of social interactions on economic decision making. We use anonymized data from Facebook, the world's largest online social network, to first explore heterogeneity in the structure of individuals' social networks. We then exploit the rich variation in the data to analyze the effects of social interactions on housing market investments. To do this, we combine the social network information with housing transaction data. Variation in the geographic dispersion of social networks, combined with time-varying regional house price changes, induces heterogeneity in the house price experiences of different individuals' friends. We show that individuals whose geographically distant friends experienced larger recent house price increases are more likely to transition from renting to owning. They also buy larger houses and pay more for a given house. Similarly, when homeowners' friends experience less positive house price changes, these homeowners are more likely to become renters, and more likely to sell their property at a lower price. We find that these relationships are driven by the effect of social interactions on individuals' housing market expectations. Survey data show that individuals whose geographically distant friends experienced larger recent house price increases consider local property a more attractive investment, with bigger effects for individuals who regularly discuss such investments with their friends.

Social Connectedness: Measurement, Determinants, and Effects

Journal of Economic Perspectives, 32(3), Summer 2018

Coauthors: Michael Bailey, Ruiqing Cao, Johannes Stroebel and Arlene Wong

View Abstract

[WP Version]

Appendix

SCI Data

Public Health Post

VoxEU

F8 Talk

Media Coverage:

New York Times

Economist

AEA

Marginal Revolution

Bloomberg

We introduce a new measure of social connectedness between U.S. county pairs, as well as between U.S. counties and foreign countries. Our measure, which we call the Social Connectedness Index (SCI), is based on the number of friendship links on Facebook, the world's largest online social network. Within the U.S., social connectedness is strongly decreasing in geographic distance between counties. The population of counties with more geographically-dispersed social networks is richer, more educated, and has higher life expectancy. Region-pairs that are more socially connected have higher trade flows, even after controlling for geographic distance and the similarity of regions along other demographic and socioeconomic measures. Higher social connectedness is also associated with more cross-county migration and patent citations. Social connectedness between U.S. counties and foreign countries is correlated with past migration patterns, with social connectedness decaying in the time since the primary migration wave from that country. Trade with foreign countries is also strongly related to the social connectedness with those countries. These results suggest that the SCI captures an important role of social networks in facilitating economic and social interactions. Our findings highlight the potential for the SCI to mitigate the measurement challenges that pervade empirical literatures that study the role of social interactions across the social sciences.

Assessing Sale Strategies in Online Markets using Matched Listings

American Economic Journal: Microeconomics , 7(2), May 2015

Coauthors: Liran Einav, Jonathan Levin and Neel Sundaresan

View Abstract

The internet has dramatically reduced the cost of varying prices, displays and information provided to consumers, facilitating both active and passive experimentation. We document the prevalence of targeted pricing and auction design variation on eBay, and identify hundreds of thousands of experiments conducted by sellers across a wide array of retail products. We use the data to measure the dispersion in auction prices for identical goods sold by the same seller, to estimate nonparametric auction demand curves, to analyze the effect of "buy it now" options and other auction design parameters, and to assess consumer sensitivity to shipping fees. We also investigate the robustness of the results by isolating different types of identifying variation, as well as the heterogeneity of the estimates across item categories. We argue that leveraging the experiments of market participants takes advantage of the scale and heterogeneity of online markets and can be a powerful approach for testing and measurement.