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Building Social Capital Through MicroFinance

  • Benjamin Feigenberg
  • Erica M. Field
  • Rohini Pande

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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16018.

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Date of creation: May 2010
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Publication status: published as “The Economic Returns to Social Interaction: Experimental Evidence from Microfinance” (with Rohini Pande and Benjamin Feigenberg). Review of Economic Studies , October 2013, 80(4): 1459 - 1483 .
Handle: RePEc:nbr:nberwo:16018
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