Working Paper: NBER ID: w11648
Authors: Luigi Guiso; Paola Sapienza; Luigi Zingales
Abstract: We provide a new explanation to the limited stock market participation puzzle. 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 stock, 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. The calibration of the model shows that this problem is sufficiently severe to account for the lack of participation of some of the richest investors in the United States as well as for differences in the rate of participation across countries. We also find evidence consistent with these propositions in Dutch and Italian micro data, as well as in cross country data.
Keywords: trust; stock market participation; risk aversion; ambiguity aversion
JEL Codes: D1; D8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lower trust (Z13) | Fewer individuals participating in the stock market (G19) |
| Trusting individuals (Z13) | More likely to buy stocks (G40) |
| Trusting individuals (Z13) | Share of wealth invested in stocks increases (E21) |
| Lack of trust (D83) | Higher thresholds of wealth required to invest (G19) |
| Generalized trust (Z13) | Positive impact on stock market participation (G41) |
| Cultural variations in trust (Z13) | Differences in stock market development (G10) |