Information Asymmetry and Trust: A Framework for Studying Micro-Finance in India

The work in the area of microfinance has concentrated on the issue of transaction costs in delivering the financial services to the poor. However, the mechanisms of reducing transaction costs have been mostly in the area of building trusts within local communities and using trust as an effective surrogate for sorting the twin problems of inadequate information and high cost of transactions. The paper presents a theoretical framework to study the field of microfinance from this point of view. There has been significant literature both in Economics as well as in Behavioural Sciences in examining the role of trust in organisational settings. This paper postulates that the element could be extended to networks like self-help groups. Eventually, it tries to identify some thresholds where the concept of trust and social capital can be used as a surrogate to reduce transaction-documentation costs and when the costs become indifferent to the underlying trust in exchanges.