Coping with Economic Shocks: Social Networks and Credit Markets as Resource Providers

• In Event: Economía y finanzas

Abstract

Households have access to Social Networks (family and friends) and Market Institutions to get resources that help them cope with economic shocks. The relationship between these two specific institutions has not been sufficiently explored, although related questions have been extensively analyzed (i.e. social help vs. state transfers). This paper extends and complements previous results that pointed towards some level of crowding out of social networks by market credit expansion in low income settings. We seeks to answer the question about how do households use these institutions in an environment in which Social Networks and Market Institutions are both are available. Using data from Mexico (MxFLS) and Colombia (ELCA), we explore the empirical relationship between these two institutions. First, we find that social networks resources are used by low and high income households. Second, we show that when households use both sources of income, the higher are the resources taken from one institution, the higher the resources taken from the other. This is particularly strong for high income households. Additionally we provide evidence that households with weaker social networks compensate this weakness increasing their use of credit markets. These results allow us to sustain that households favor a mixture use of both institutions, rather than a strong preference of one over the other. Finally, we formulate some hypothesis of the effect of such behavior on household welfare and discuss future research paths.

Author

• Santiago Gomez Cardona