The Economic Effects of Social Networks.

• Author: Stroebel, Johannes

Researchers have long understood that social interactions can shape many aspects of social and economic activity, including migration, trade, job-seeking, investment behavior, product adoption decisions, and social mobility. (1) Traditionally, however, it has been challenging to analyze and quantify the economic effects of social interactions, in large part because of the absence of large-scale and representative data on social networks.

Over the past years, we have worked with deidentified data on social connections from Facebook to expand our understanding of the role of social networks across a large number of settings in economics and finance. Facebook is unique in its scale and coverage: at the end of 2020, the social network had 2.8 billion active users globally and 258 million active users in the United States and Canada, providing a rare opportunity to measure real-world social networks at population scale. Here we review some of our findings from this body of work, which uses both deidentified individual-level data and publicly available aggregated data on social connections between geographies.

Shaping Beliefs and Behaviors in the Housing Market

In a first series of papers, we studied the effect of social interactions in the housing market. In a paper with Michael Bailey and Rachel Cao, we showed that individuals are more likely to consider housing a good investment--and are in fact more likely to actually purchase a house--if their friends experienced larger recent house price increases. (2)

This project started from the observation that different people living in the same neighborhood can be exposed to very different housing market experiences through their social networks. Consider two neighbors living in New York, Amy and Ben. Amy has many friends who live in San Diego, a housing market that has been booming over the past decade, and therefore often hears her friends talk about rising house prices. Ben has more friends living in Chicago, which has seen much lower house price growth, and hears far fewer stories about fast house price growth. We investigated whether the different stories that Amy and Ben hear from their friends affected whether they considered buying a house in New York to be a good investment.

To measure people's housing market beliefs, Facebook conducted an online survey of some of its users in Los Angeles. We found that individuals living in the same zip code often disagreed substantially in their expectations about future local house price growth. We then matched individuals' survey responses to deidentified data on the location of their Facebook friends, and discovered that individuals with friends living in areas of the US where house prices had recently gone up were more optimistic about Los Angeles housing market investments than individuals with friends in parts of the country where house prices had not done so well. Importantly, all of this effect was concentrated among the subset of people--comprising about half of our sample--who had told us in the survey that they regularly talked with their friends about housing market developments.

After showing that friends' house price experiences influence the way people perceive housing market investments, we investigated whether social interactions with their friends also affected people's decisions to buy a house. We found that individuals whose friends experienced larger recent house price increases were more likely to transition from renting to owning. They also bought larger houses and paid more for a given house. These results highlight that individuals' investment decisions are not made in a social vacuum. What they hear from their friends affects how attractive they perceive an asset to be, even if the experience of those friends arguably does not contain a lot of information that is relevant for the true valuation of the asset.

In follow-on work with Bailey and Eduardo Davila, we showed that social interactions, through influencing housing market beliefs, also affect individuals' leverage choices in the mortgage market. (3) Specifically, we found that individuals whose friends had experienced recent house price declines--and who were thus more pessimistic--chose smaller down payments and higher leverage in an attempt to shield their savings from possible declines in house prices.

Peer Effects in Product Adoption

We next...