Trusting the Stock Market [Abstract], (L. Guiso, P. Sapienza and L. Zingales), The Journal of Finance, December 2008, Volume 63, Issue 6 (p 2557-2600).
ABSTRACT: We study the effect that a general lack of trust can have on stock market participation. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function not only of the objective characteristics of the stocks, but also of the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. We find evidence consistent with these propositions in Dutch and Italian micro data, as well as in cross country data. All the evidence suggests that lack of trust could be an important factor in explaining the limited participation puzzle, especially among more wealthy investors.
Finance professor honored with Smith Breeden Prize
Cultural Biases in Economic Exchange? [Abstract] [Supporting Online Materials], (L. Guiso, P. Sapienza and L. Zingales), forthcoming in The Quarterly Journal of Economics, 124(3), August 2009.
ABSTRACT: How much do cultural biases affect economic exchange? We try to answer this question
by using data on bilateral trust between European countries. We document that this trust
is affected not only by the characteristics of the country being trusted, but also by cultural
aspects of the match between trusting country and trusted country, such as religion, history
of conflicts, and genetic and somatic similarities. We then find that lower bilateral trust leads to less trade between two countries, less portfolio investment, and less direct investment, even after controlling for the characteristics of the two countries. This effect is stronger for goodsthat are more trust intensive. Our results suggest that perceptions rooted in culture are
important (and generally omitted) determinants of economic exchange.
The Role of Social Capital in Financial Development [Abstract] (L. Guiso, P. Sapienza and L. Zingales), American Economic Review, June 2004, 94(3): 526-556 (Published paper available online through the American Economic Association.)
ABSTRACT: To identify the effect of social capital on financial development, we exploit the well-known differences in social capital (Banfield (1958), Putnam (1993)) across different parts of Italy. In areas of the country with high levels of social capital, households invest less in cash and more in stock, use more checks, have higher access to institutional credit, and make less use of informal credit. The effect of social capital is stronger where legal enforcement is weaker and among less-educated people. These results are not driven by omitted environmental variables, since we show that the behavior of movers is still affected by the level of social capital present in the province where they were born.
Does Culture Affect Economic Outcomes? [Abstract], (L. Guiso, P. Sapienza and L. Zingales), The Journal of Economic Perspectives, Spring 2006, 20(2): 23-48. (Published paper available online through the American Economic Association.)
ABSTRACT: Economists have been reluctant to rely on culture as a possible determinant of economic phenomena. The notion of culture is so broad and the channels through which it can enter the economic discourse so vague that it is difficult to design testable hypotheses. In this paper we show this does need to be the case. We introduce a narrower definition of culture that allows for a simple methodology to develop and test cultural-based explanations. We also present several applications of this methodology: from the choice to become entrepreneur to that of how much to save, to end with the political decision on income redistribution.