Social Connections and Group Banking

Dean Karlan

Working Papers from Economic Growth Center, Yale University

Abstract: Lending to the poor is expensive due to high screening, monitoring, and enforcement costs. Group lending advocates believe lenders overcome this by harnessing social connections. Using data from FINCA-Peru, I exploit a quasi-random group formation process to find evidence of peers successfully monitoring and enforcing joint-liability loans. Individuals with stronger social connections to their fellow group members (i.e., either living closer or being of a similar culture) have higher repayment and higher savings. Furthermore, I observe direct evidence that relationships deteriorate after default, and that through successful monitoring, individuals know who to punish and who not to punish after default.

Keywords: Microfinance; Group lending; informal savings; social capital (search for similar items in EconPapers)
JEL-codes: O12 O16 O17 Z13 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2005-06
New Economics Papers: this item is included in nep-dev and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (17)

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http://www.econ.yale.edu/growth_pdf/cdp913.pdf (application/pdf)

Related works:
Journal Article: Social connections and group banking (2007)
Working Paper: Social Connections and Group Banking (2007)
Working Paper: Social Connections and Group Banking (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:egc:wpaper:913

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