Abstract:
We present evidence showing that individual beliefs on the effectiveness of formal and informal sources of risk sharing determine financial precautionary behavior; net liquid wealth decreases in high expectations regarding public insurance but increases in high expectations regarding communal insurance. We rationalize this dichotomy in a dynamic portfolio choice model with private risk sharing. Moreover, we find that both beliefs affect the probability to take on financial risk to become a homeowner and the mortgage loan-to-value ratio. Our findings are robust across a wide range of econometric controls and specifications.