Trust and the Choice Between Housing and Financial Assets: Evidence from Spanish Households

Abstract

Trusting behavior has been shown to affect households' portfolio choice between risky and risk-free financial assets. We extend the analysis to include the dominant component of households' portfolios, real estate. Using data from the European Social Survey, we estimate individual-level trust by applying a hierarchical item response model. Combining these estimates with data on Spanish households' financial decisions from the Survey of Household Finances, we show that households with less trust invest more in housing and less in financial assets, in particular risky ones. Trust thus may drive not only (limited) stock market participation but also financial development more generally. Copyright 2011, Oxford University Press.