How Does Household Financial Behavior Respond to Changes in the Economic Environment?

Project Start:01/2013
Status:Completed
Researchers:
Category: Household Finance
Funded by:LOEWE

Financial innovation continually adds to the array of products available for generating wealth, smoothing consumption, and managing risks, thus creating the need for households to familiarize themselves with new and often complicated financial instruments. The potential for impulsive purchases by customers unfamiliar with the financial product has led regulators recently to require tests of familiarity (e.g., under MIFID), or even to ban sales of complicated financial products (e.g., structured products in Belgium).

However, banning or restricting access to innovative financial products imposes costs and creates the risk that new financial products will not reach those who could benefit from them. Consequently, before we restrict or encourage access on the basis of (lack of) familiarity, we need to understand the nature of the link between familiarity and participation. In order to uncover the role of familiarity in participation decisions we draw on the separation of Germany into East and West Germany as a large scale “field experiment”. Given the deprivation of East Germans from ‘capitalist’ products and the exogenous opening up of similar opportunities to both groups following reunification, we are able to analyze the link between familiarity and participation.

Key findings

− Lack of familiarity with stocks does not prevent East Germans from participating in the stock market to the same extent as their West German counterparts with similar characteristics.

− The tendency of East Germans to participate in consumer credit is actually greater than that of their West German counterparts.

− Our findings do not contradict the importance of measures to promote awareness or financial literacy. Indeed, East Germans were faced with West German financial institutions that were experienced in delivering and advising on capitalist financial products, and with a set of peers familiar with their use.

 

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
63Does Product Familiarity Matter for Participation?2014 Household Finance household finance, familiarity, financial literacy, stockholding, household debt, social interactions, consumer credit, counterfactual analysis, German reunification
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