Social capital and microfinance

Thesis (Ph.D.)--Massachusetts Institute of Technology, Dept. of Economics, 2002.Includes bibliographical references.Chapter one is titled "Social Capital and Group Banking." Lending to the poor is costly due to high screening, monitoring, and enforcement costs. Group lending advocates believe individuals are able to select creditworthy peers, monitor the use of loan proceeds, and enforce repayment better than an outside lending organization can by harnessing the social capital in small groups. Using data collected from FINCA-Peru, I exploit the randomness inherent in their formation of lending groups to identify the effect of social capital on group lending. I find that having more social capital results in higher repayment and higher savings. I also find suggestive evidence that in high social capital environments, group members are better able to distinguish between default due to moral hazard and default due to true negative personal shocks. Chapter two is titled "Can Games Measure Social Capital and Predict Financial Decisions." Economic theory suggests that market failures arise when contracts are difficult to enforce or observe. Social capital can help to solve these failures. Measuring social capital has become a great challenge for social capital research. I examine whether behavior in a trust game predicts future financial behavior. I find that trustworthy behavior in the game predicts higher loan repayment and savings deposits, whereas more trusting behavior predicts the opposite. Analyzing General Social Survey responses to questions on trust, fairness and helping others, I find that those with more positive attitudes towards others are more likely to repay their loan.(cont.) Chapter three is titled "When Curiosity Kills Profits: An Experimental Examination." Economic theory predicts that under Bertrand competition, with equal and observable costs, firms earn zero profits. Theory also predicts that if costs are not common knowledge, firms should use their weakly dominant strategy of pricing above marginal cost and earn positive profits. Hence, rational profit-maximizing Bertrand firms should prefer less public information. In an auction game, we find that individuals without information on each other's valuations earn more profits than those with common knowledge. Then, given a choice between the two rules, half the individuals preferred to have the information. We discuss possible explanations, including ambiguity aversion.by Dean S. Karlan.Ph.D