Debt-induced crises, including the subprime, are usually attributed exclusively to supply-side factors. We uncover an additional factor contributing to debt culture, namely social influences emanating from the perceived average income of peers. Using unique information from a representative household survey of the Dutch population that circumvents the need to define the social circle, we consider collateralized, consumer, and informal loans. We find robust social effects on borrowing—especially among those who consider themselves poorer than their peers—and on indebtedness, suggesting a link to financial distress. We check the robustness of our results using several approaches to rule out spurious associations and handle correlated effects.

Keywords: Household finance, household debt, social interactions, mortgages, consumer credit, informal loans.
JEL Classifications: G11, E21

 VIEW PAPER