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Building Social Capital through Microfinance

  • Feigenberg, Benjamin

    (MIT)

  • Field, Erica M.

    (Harvard University)

  • Pande, Rohini

    (Harvard University)

A number of development assistance programs promote community interaction as a means of building social capital. Yet, despite strong theoretical underpinnings, the role of repeat interactions in sustaining cooperation has proven difficult to identify empirically. We provide the first experimental evidence on the economic returns to social interaction in the context of microfinance. Random variation in the frequency of mandatory meetings across first-time borrower groups generates exogenous and persistent changes in clients' social ties. We show that the resulting increases in social interaction among clients more than a year later are associated with improvements in informal risk-sharing and reductions in default. A second field experiment among a subset of clients provides direct evidence that more frequent interaction increases economic cooperation among clients. Our results indicate that group lending is successful in achieving low rates of default without collateral not only because it harnesses existing social capital, as has been emphasized in the literature, but also because it builds new social capital among participants.

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Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp10-019.

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Date of creation: Jun 2010
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Handle: RePEc:ecl:harjfk:rwp10-019
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  16. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
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  18. Forsythe Robert & Horowitz Joel L. & Savin N. E. & Sefton Martin, 1994. "Fairness in Simple Bargaining Experiments," Games and Economic Behavior, Elsevier, vol. 6(3), pages 347-369, May.
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  22. Fudenberg, Drew & Levine, David, 2009. "Repeated Games with Frequent Signals," Scholarly Articles 3160491, Harvard University Department of Economics.
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