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Social Connections and Group Banking

  • Dean S. Karlan

    (Princeton University)

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 quasirandom 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 Princeton University, Woodrow Wilson School of Public and International Affairs, Research Program in Development Studies. in its series Working Papers with number 181.

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Date of creation: May 2005
Date of revision:
Handle: RePEc:pri:rpdevs:karlan_d_soccap_grp_bankingpaper
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  1. Alberto Alesina & Reza Baqir & Caroline Hoxby, 2004. "Political Jurisdictions in Heterogeneous Communities," Journal of Political Economy, University of Chicago Press, vol. 112(2), pages 348-396, April.
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  10. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2000. "The Role of Social Capital In Financial Development," CEPR Discussion Papers 2383, C.E.P.R. Discussion Papers.
  11. Ghatak, Maitreesh, 2000. "Screening by the Company You Keep: Joint Liability Lending and the Peer Selection Effect," Economic Journal, Royal Economic Society, vol. 110(465), pages 601-31, July.
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  17. Dean Karlan, 2004. "Using experimental economics to measure social capital and predict financial decisions," Artefactual Field Experiments 00074, The Field Experiments Website.
  18. Knack, Stephen, 2002. "Social capital, growth and poverty: a survey of cross-country evidence," MPRA Paper 24893, University Library of Munich, Germany, revised 0200.
  19. Ashok S. Rai & Tomas Sj–str–m, 2004. "Is Grameen Lending Efficient? Repayment Incentives and Insurance in Village Economies," Review of Economic Studies, Wiley Blackwell, vol. 71(1), pages 217-234, 01.
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