Working Paper: CEPR ID: DP10632
Authors: Nicola Fuchs-Schündeln; Michael Haliassos
Abstract: Household access to financial products is often conditioned on previous use. However, banning access when learning is possible may be discriminatory or counter-productive. The ?experiment? of German reunification (exogenously) offered to East Germans unconditional access to (exogenously) unfamiliar capitalist products. Controlling for characteristics, East Germans participated immediately, were as likely to use unfamiliar risky securities as West Germans, and more likely to use consumer debt, without signs of regret. Our results suggest that mistakes of unfamiliar households can be prevented by a knowledgeable and well-incentivized financial sector and by interaction with familiar peers. This implies that regulation should refocus on the financial sector rather than on prohibiting individuals to gain familiarity with financial products.
Keywords: consumer credit; familiarity; financial literacy; household debt; household finance; investor protection; regulation; stockholding
JEL Codes: E21; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| previous exposure to capitalist financial products in West Germany (P34) | product familiarity (L15) |
| product familiarity (L15) | engagement in securities by East Germans (P33) |
| peer influence and financial sector incentives (G21) | participation in financial products (G29) |
| East Germans (P39) | consumer debt (G51) |
| broader context of knowledge, incentives, and peer influences (C92) | financial behavior (G53) |
| product familiarity (L15) | participation in financial products (G29) |