Social Connections and Group Banking

Dean Karlan

No 6194, CEPR Discussion Papers from Centre for Economic Policy Research

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: Group lending; Informal savings; Microfinance; Social capital (search for similar items in EconPapers)
JEL-codes: O12 O16 O17 Z13 (search for similar items in EconPapers)
Date: 2007-03
New Economics Papers: this item is included in nep-dev, nep-mfd and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (207)

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Related works:
Journal Article: Social connections and group banking (2007)
Working Paper: Social Connections and Group Banking (2005)
Working Paper: Social Connections and Group Banking (2005)
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