Developing from the Margins Microfinance Repayment Incentives and Social Proximity

Karlye Dilts

Date of Award

2007

Document Type

Thesis

Degree Name

Bachelors

Department

Social Sciences

First Advisor

Alcock, Frank

Keywords

Microfinance, Social Capital, Asymmetric Information

Area of Concentration

Political Science

Abstract

This thesis examines the role of social ties in enhancing repayment rates for group-based lending institutions. Chapter one includes a brief overview of credit market failure in equilibrium, relying heavily on the adverse selection analysis used in Stiglitz and Weiss (1989), and introduces the informal credit schemes upon which the logic of group lending is based. Chapter two presents a review of the literature on microfinance repayment incentives and on the role played by social interactions in economic institutions. The topics include social capital, social norms, institutions, information asymmetry, moral hazard, strategic default, risk pooling, assortative matching, peer monitoring, mutual insurance, and peer pressure. Chapter three utilizes a two-player expected utility analysis to examine the inability of neoclassical economic assumptions to explain observed phenomena. Players are either risk averse or risk seeking and choose between a risky and a safe investment. The analysis results in free riding on the part of the risk-seeking partner. Chapter four reexamines an empirical study conducted by Bruce Wydick (1999) in western Guatemala using binary LOGIT estimation. Interaction variables were tested that combined the effects of friendship and operating in the same business with knowledge of the weekly sales of fellow group members, the ability to apply pressure, and moral obligation to repay loans. The dependent variables in the study included overall repayment rates for the groups, provision of mutual insurance, and the mitigation of moral hazard. To clarify the effects of social ties on information sharing and costs of enforcement, chapter four includes estimations modeling knowledge of sales, moral obligation, and willingness to apply pressure on variables reflecting social proximity. The results of the regressions indicated that difficulty in enforcing repayment, combined with friendship, increases the instance of moral hazard in the rural and united samples and decreased repayment rates in the rural sample. However, operating in the same business and being friends with fellow group members together had a positive and significant relationship to repayment rates. It seems that friendship has a positive and significant relationship to a moral obligation to repay loans, though it had a negative relationship to knowledge of weekly sales in both the rural and urban samples. The final chapter includes an overview of the thesis and makes suggestions for future research.

Rights

This bibliographic record is available under the Creative Commons CC0 public domain dedication. The New College of Florida, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.

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