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Social Connections and Group Banking

  • Karlan, Dean S.

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6194.

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Date of creation: Mar 2007
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Handle: RePEc:cpr:ceprdp:6194
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  8. Jonathan Morduch, 1999. "The Microfinance Promise," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1569-1614, December.
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  19. Morduch, Jonathan, 1999. "The role of subsidies in microfinance: evidence from the Grameen Bank," Journal of Development Economics, Elsevier, vol. 60(1), pages 229-248, October.
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    • Glaeser, Edward Ludwig & Laibson, David I. & Scheinkman, Jose A. & Soutter, Christine L., 2000. "Measuring Trust," Scholarly Articles 4481497, Harvard University Department of Economics.
  26. Dean Karlan & Xavier Gine & Jonathan Morduch & Pamela Jakiela, 2006. "Microfinance Games," Working Papers 936, Economic Growth Center, Yale University.
  27. La Ferrara, Eliana, 2003. "Kin Groups and Reciprocity: A Model of Credit Transactions in Ghana," CEPR Discussion Papers 3705, C.E.P.R. Discussion Papers.
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  33. repec:hrv:faseco:4553034 is not listed on IDEAS
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