Social connections and group banking

Dean S. Karlan*

*Corresponding author for this work

Research output: Contribution to journalArticle

215 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)F52-F84
JournalEconomic Journal
Volume117
Issue number517
DOIs
StatePublished - Feb 1 2007

ASJC Scopus subject areas

  • Economics and Econometrics

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