Working Paper: CEPR ID: DP6194
Authors: Dean S. Karlan
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
JEL Codes: O12; O16; O17; Z13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stronger social connections (Z13) | better repayment outcomes (G51) |
| stronger social connections (Z13) | more savings (D14) |
| monitoring (E63) | knowledge of repayment status (G51) |
| knowledge of repayment status (G51) | repayment behavior (G51) |
| better-connected individuals (Z13) | more likely to be forgiven after defaulting (G33) |
| stronger social connections (Z13) | enhance monitoring and enforcement of loans (G21) |