The Economic Returns to Social Interaction: Experimental Evidence from Microfinance

Microfinance clients were randomly assigned to repayment groups that met ei- ther weekly or monthly during their first loan cycle, and then graduated to identical meeting frequency for their second loan. Long-run survey data and a follow-up pub- lic goods experiment reveal that clients initially assigned to weekly groups interact more often and exhibit a higher willingness to pool risk with group members from their first loan cycle nearly two years after the experiment. They were also three times less likely to default on their second loan. Evidence from an additional treat- ment arm show that, holding meeting frequency fixed, the pattern is insensitive to repayment frequency during the first loan cycle. Taken together, these findings con- stitute the first experimental evidence on the economic returns to social interaction, and provide an alternative explanation for the success of the group lending model in reducing default risk.

Feigenberg et al. (2011)

Region:

Urban and peri-urban.RCT.Individual liability loans. Tested the impact of meeting frequency and social interaction on repayment rates of individual-liability loans.In the absence of group liability and enforcement, more frequent group meetings led to greater social interaction and reduced default rates.http://www.hks.harvard.edu/fs/rpande/socialcap_restud_april19%20II.pdfFirst time microfinance bank clients living in peri-urban slums in the city of Kolkata. Over 70% owned a business and median client's HH income just below a dollar a day. 100% women.