Using error-free data on life-cycle portfolio allocations of a large sample of Norwegian households, we document a double adjustment as households age: a rebalancing of the portfolio composition away ...from stocks as they approach retirement and stock market exit after retirement. When structurally estimating an extended life-cycle model, the parameter combination that best fits the data is one with a relatively large risk aversion, a small per-period participation cost, and a yearly probability of a large stock market loss in line with the frequency of stock market crashes in Norway.
Trusting the Stock Market GUISO, LUIGI; SAPIENZA, PAOLA; ZINGALES, LUIGI
The Journal of finance (New York),
December 2008, Volume:
63, Issue:
6
Journal Article
Peer reviewed
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 of the objective characteristics of the stocks and the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. In Dutch and Italian micro data, as well as in cross-country data, we find evidence consistent with lack of trust being an important factor in explaining the limited participation puzzle.
Does Culture Affect Economic Outcomes? Guiso, Luigi; Sapienza, Paola; Zingales, Luigi
The Journal of economic perspectives,
04/2006, Volume:
20, Issue:
2
Journal Article
Peer reviewed
Open access
Until recently, economists have been reluctant to rely on culture as a possible determinant of economic phenomena. Much of this reluctance stems from the very notion of culture: it is so broad and ...the channels through which it can enter the economic discourse so ubiquitous (and vague) that it is difficult to design testable, refutable hypotheses. In recent years, however, better techniques and more data have made it possible to identify systematic differences in people's preferences and beliefs and to relate them to various measures of cultural legacy. These developments suggest an approach to introducing culturally-based explanations into economics that can be tested and may substantially enrich our understanding of economic phenomena. This paper summarizes this approach and its achievements so far, and outlines directions for future research.
SUMMARY
Populist parties are likely to gain consensus when mainstream parties and status quo institutions fail to manage the shocks faced by their economies. Institutional constraints, which limit ...the possible actions in the face of shocks, result in poorer performance and frustration among voters who turn to populist movements. We rely on this logic to explain the different support of populist parties among European countries in response to the globalization shock and to the 2008–11 financial and sovereign debt crisis. We predict a greater success of populist parties in response to these shocks in Eurozone (EZ) countries, and our empirical analysis confirms this prediction. This is consistent with voters’ frustration for the greater inability of the EZ governments to react to difficult-to-manage globalization shocks and financial crises. Our evidence has implications for the speed of construction of political unions. A slow, staged process of political unification can expose the European Union to a risk of political backlash if hard to manage shocks hit the economies during the integration process.
To identify the effect of social capital on financial development, we exploit social capital differences within Italy. In high-social-capital areas, households are more likely to use checks, invest ...less in cash and more in stock, 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 of the province where they were born.
The insurance role of the firm Guiso, Luigi; Pistaferri, Luigi
The Geneva risk and insurance review,
03/2020, Volume:
45, Issue:
1
Journal Article
Peer reviewed
We review the recent literature on the risk-sharing role of the firm. We provide a framework for studying risk sharing between workers and firm owners vis-à-vis firm’s specific shocks of different ...nature. We show how this framework can be taken to the data to provide estimates of the extent of insurance within the firm. Estimates from a large number of Western countries strongly support the view that in capitalist economies the firm is a large albeit far from complete wage insurance instrument. We quantify the welfare benefits of firm-provided wage insurance, show evidence on how workers react to firm’s shocks passed through wages, and discuss the future role of the firm as a wage insurance provider.
When firms borrow from multiple concentrated creditors such as banks they appear to differentiate their allocation of borrowing. In this paper, we put forward hypotheses for this borrowing pattern ...based on incomplete contract theories and test them using a sample of small U. S. firms. We find that firms with more valuable and more homogeneous assets differentiate borrowing more sharply across concentrated creditors. Moreover, borrowing differentiation is inversely related to restructuring costs and positively related to firms' informational transparency. The results suggest that the structure of credit relationships is used to discipline creditors and entrepreneurs, especially during corporate reorganizations.
Time varying risk aversion Guiso, Luigi; Sapienza, Paola; Zingales, Luigi
Journal of financial economics,
06/2018, Volume:
128, Issue:
3
Journal Article
Peer reviewed
Open access
Exploiting portfolio data and repeated surveys of an Italian bank's clients, we test whether investors’ risk aversion increases following the 2008 crisis. We find that, after the crisis, both ...qualitative and quantitative measures of risk aversion increase substantially and that affected individuals divest more stock. We investigate four explanations: changes in wealth, expected income, perceived probabilities, and emotion-based changes of the utility function. Our data are inconsistent with the first two channels, while they suggest that fear is a potential mechanism underlying financial decisions, whether by increasing the curvature of the utility function or the salience of negative outcomes.
We obtain a model-driven measure of gender norms on intra-household financial decision making by leveraging dramatic variation across Italian cohorts and regions in the gender of the household head. ...We use these estimates to identify the effects of gender parity on household financial decisions. More egalitarian norms increase household participation in financial markets, equity holdings, asset diversification, and returns on investments. This evidence suggests that gender roles can have large economic costs. Consistent with this view, we show that patriarchal norms began receding in the early 1990s, when a pension reform made it too costly to comply with traditional roles.
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