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Those with blue hair please step forward: An economic theory of group formation and application to Cajas Rurales in Honduras

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  • Elias, Carlos G.
  • Alwang, Jeffrey Roger

Abstract

This paper presents an economic model of group formation with an application to data collected from an agricultural credit program in western Honduras. We formulate a simple theory of group formation using the concept of centers of gravity to explain why individuals join a group. According to our theory, prospective members join based on the potential benefits and costs of group membership, and based on their perception of social distance between themselves and other group members. Social distance is unobservable by outsiders but known by the individual: if you are in then you know who has blue hair. Thus, we argue that social distance helps explain preferences for group formation. To test our theory we analyze data collected from members and non-members of PRODERT, a program that has helped create 188 “Cajas Rurales” (CRs). Using conjoint analysis we test for differences in preferences between members and non-members for the main attributes of the CR. We find that members and non-members exhibit similar preferences for the attributes of the CR; therefore non-membership is not related to supply factors. Using information gathered by executing field experiments, we estimate a proxy for social distance. We use this proxy to run a group formation equation and find that it explains, along with individual characteristics, participation in the CR. Finally we offer suggestions on how to balance performance and coverage in programs in which beneficiaries decide who joins. Small cohesive groups may show exceptional performance at the cost of low coverage, and the opposite may be true.

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Bibliographic Info

Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida with number 6527.

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Date of creation: 2008
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Handle: RePEc:ags:aaea08:6527

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Keywords: Agricultural Finance; Institutional and Behavioral Economics;

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  1. Mansuri, Ghazala & Rao, Vijayendra, 2004. "Community-based (and driven) development : A critical review," Policy Research Working Paper Series 3209, The World Bank.
  2. Christian Ahlin & RobertM. Townsend, 2007. "Using Repayment Data to Test Across Models of Joint Liability Lending," Economic Journal, Royal Economic Society, vol. 117(517), pages F11-F51, 02.
  3. Stiglitz, Joseph E, 1990. "Peer Monitoring and Credit Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 351-66, September.
  4. George A. Akerlof, 1997. "Social Distance and Social Decisions," Econometrica, Econometric Society, vol. 65(5), pages 1005-1028, September.
  5. Thomas Dufhues & Franz Heidhues & Gertrud Buchenrieder, 2004. "Participatory Product Design by Using Conjoint Analysis in the Rural Financial Market of Northern Vietnam," Asian Economic Journal, East Asian Economic Association, vol. 18(1), pages 81-114, 03.
  6. Alessandra Cassar & Luke Crowley & Bruce Wydick, 2007. "The effect of social capital on group loan repayment: evidence from field experiments," Economic Journal, Royal Economic Society, vol. 117(517), pages F85-F106, 02.
  7. Edward Glaeser & Giacomo Ponzetto & Andrei Shleifer, 2006. "Why Does Democracy Need Education?," NBER Working Papers 12128, National Bureau of Economic Research, Inc.
  8. Hoffman, Elizabeth & McCabe, Kevin & Smith, Vernon L, 1996. "Social Distance and Other-Regarding Behavior in Dictator Games," American Economic Review, American Economic Association, vol. 86(3), pages 653-60, June.
  9. Feder, Gershon & Savastano, Sara, 2006. "The role of opinion leaders in the diffusion of new knowledge : the case of integrated pest management," Policy Research Working Paper Series 3916, The World Bank.
  10. Jansen, Hans G.P. & Siegel, Paul B. & Pichón, Francisco, 2005. "Identifying the drivers of sustainable rural growth and poverty reduction in Honduras," DSGD discussion papers 19, International Food Policy Research Institute (IFPRI).
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