Social Capital, Community Governance and Credit Market

Financial contracts represent an exchange of financial resources today, such as money, for a promise to return more financial resources tomorrow. The aim of the paper is to test whether cheating or respecting a promise, in particular a "financial one", is also a matter of community norms in which the individuals are involved. According to the social capital literature, where a community is characterised by a high level of social capital, then a higher level of civic engagement, trustworthiness and self monitoring among its members occur. These elements characterise the so called community governance. By using regional data from Italy, the paper will analyse the association between the community governance, through different aspects of social capital, and credit market variables such as interest rate, credit supply and insolvency rate without and with legal institutional enforcements. Empirical evidence shows that, in absence of legal enforcement, indicators of structural social capital, civic engagement and outcome-based social capital are positively related to better credit market performances. When legal enforcement is included in our models still social capital, through the civic engagement aspect, negatively affects the insolvency rate by confirming our hypothesis of complementarity among community state and market.