Social network effects in financial intermediation
Creators: name: Dornseifer, Felix
Publisher: name: TU Dortmund
Year: 2024
Subjects: subject: Financial intermediation
subject: 330
subject: Finanzintermediäre
subject: Social Media
subject: Klimaänderung
subject: Risikomanagement
subject: Direktinvestition

description: Information transmission via social networks has always played a pivotal role in economic decision making. Leveraging Facebook's Social Connectedness Index (SCI), which provides a comprehensive measure of interregional real-world social ties derived from online friendship links, this thesis explores the effects of social networks across three distinct players in financial intermediation: firms, banks and insurers. The questions covered address timely issues, including growing relevance of climate risks and macroeconomic uncertainty in foreign direct investment (FDI) decisions, technological disruptions of traditional banking systems and climate risks for private households' assets. The first chapter investigates how cross-country social networks can mitigate frictions in FDI. Investors often encounter substantial challenges related to legal, cultural, and political factors when investing in foreign markets. Information on how to navigate these differences easily are often scarce. Social connectedness is associated with a significant increase in FDI, even when accounting for known FDI-determining factors like physical distance. By bridging information asymmetries, real-world social connections can overcome a variety of frictions such as not sharing common business relationships or being culturally dissimilar. Negative consequences of climate-related risks can be attenuated. Finally, social connectedness can mitigate macroeconomic uncertainty, independent from institutional differences. The second chapter focuses in technological developments in providing residential mortgages and the repercussions on local bank branches. With financial technology (``fintech") companies flourishing, banks significantly downsized their branch networks. This chapter shows a negative relationship between rising residential mortgage market shares of fintech lenders and number of traditional bank branches. It suggests that a significant share of branch closures can be attributed to the rise of fintechs, complicating consumer access to financial products and having implications for banks and monetary policy transmission. To disentangle opposing effects of regulatory pressure and technological advanced market entrants, the SCI is used as an instrumental variable to identify variation in the local fintech adoption. The third chapter helps to better understand the factors that lead private homeowners to insure their property against elemental damage. Using the catastrophic 2021 flood in Germany as a natural experiment, it demonstrates how social connectedness influences insurance uptake rates in unaffected regions. The results show that stronger social ties into the affected areas increase the likelihood of homeowners purchasing additional insurance coverage. People receive an update about their own flood risk via a social learning mechanism, triggered by first-hand experiences of affected peers. The effect is moderated by regional disparities in climate policy attitudes and the intensity of different types of social capital. This thesis uses granular social network data to examine how information flows across borders and communities. It explores how social ties boost cross-border investments, promote new lending technologies, and drive peer effects in insurance markets. The findings offer insights for policymakers and financial institutions aiming to leverage social networks to reduce financial market frictions, enhance economic integration, maintain access to financial services, and manage risks for banks, firms, and households.