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Trusting the Stock Market





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    • Luigi Guiso is from European University Institute and CEPR. Paola Sapienza is from Northwestern University, NBER, and CEPR. Luigi Zingales is from University of Chicago, NBER, and CEPR. We thank Raghu Suryanarayanan for truly excellent research assistance. Daniel Ferreira, Owen Lamont, Ľuboš Pástor, Annette Vissing-Jørgensen, an anonymous referee, as well as participants at seminars at the NBER Capital Markets and the Economy summer meeting, NBER Behavioral Finance November meeting, Bank of Italy conference “The Building Blocks of Effective Financial Systems,” Columbia University, Dutch National Bank, European Central Bank, European Summer Symposium in Financial Markets, Harvard University, Imperial College, Institute for the Study of Labor, New York University, Northwestern University, Oxford University, Stanford University, MIT, Texas University at Austin, and University of Chicago have provided helpful comments. Luigi Guiso thanks Ministero dell'Università e della Ricerca and the European Economic Community, Paola Sapienza the Center for International Economics and Development at Northwestern University and the Zell Center for Risk Research, and Luigi Zingales the Stigler Center at the University of Chicago for financial support.


We study the effect that a general lack of trust can have on stock market participation. In deciding whether to buy stocks, investors factor in the risk of being cheated. The perception of this risk is a function of the objective characteristics of the stocks and the subjective characteristics of the investor. Less trusting individuals are less likely to buy stock and, conditional on buying stock, they will buy less. In Dutch and Italian micro data, as well as in cross-country data, we find evidence consistent with lack of trust being an important factor in explaining the limited participation puzzle.