Household debt and social interactions

At the core of the recent financial crisis were a considerable number of households that exposed themselves to risks of negative equity by taking on excessive levels of mortgage debt. The ensuing crisis makes it important to understand factors that contribute to the spread of debt culture. Our paper uncovers a potentially strong social multiplier in household debt behavior emanating from perceptions of average incomes in the social circle and of the ability of households to spend on consumer goods and on housing assets. We use unique information from the DNB Household Survey representative of the Dutch population to test the presence and significance of such effects of social interactions on the tendency of households to undertake mortgages, consumer debt, and informal debts from friends, as well as for the amounts of any such debts undertaken. The DNB Survey asks direct questions about characteristics of the social circle as perceived by respondents, circumventing the usual problem faced in applied research of having to construct the social circle of the household on the basis of key demographic characteristics of respondents. We find strongly significant and quite robust effects of such social interactions on all types of debt, suggesting that a social multiplier can contribute to spreading debts among household populations during boom times that may well turn out to be unsustainable when the boom ends.