Final Report Summary - SSD (Social capital and enforcement of informal contracts in developing economies)
Our starting point is that informal contracts in developing economies are inherently difficult to enforce and may require the existence of social sanctions. Such social sanctions can however be used to support another type of behavior, which is not socially desirable. For instance, in the context of microfinance, we investigated the role played by social sanctions in enforcing repayment to the bank, but found that under the same conditions, they could also be used by the group to enforce collective default. Hence, beliefs or norms are essential in eliciting the proper repayment behavior from group members. We then conducted a lab experiment replicating the environment of a microfinance group under joint liability and adding a ‘punishing’ phase, whereby members could decide to exclude any member from a collective activity. We find that repayment decisions closely follow individual incentives, except for social sanctions, whereby members punish those perceived as cheating even when it reduced their immediate benefit.
We carried out a census of microfinance groups in parts of Northern India, with a view to investigate the long run participation of traditionally disadvantaged villagers. We found that lower caste people are less likely to become permanent members of a self-help group, they are more likely to leave such groups and their groups are also more likely to fail. By contrast, poor landless agricultural workers draw large benefits from their participation and receive on average more than double the amounts of bank loans given to members with larger landholdings. In a parallel panel survey of 1500 families, we explored the long run consequences of participating to a micro finance group and found members of self-help groups were significantly more likely to enroll their children in school; these children were more likely to continue after completing compulsory education; and their dropout rates were lower. These effects are particularly strong for girls, and are accompanied by a decline in child labor.
Extended families are a major source of solidarity transfers in sub-Saharan Africa, and are subject to a host of implicit sanctions. We undertook an investigation of those arrangements among the Bamileke people of Western Cameroon, having documented from a set of preliminary interviews that people use a large variety of strategies to avoid requests for help. For instance, they may take unnecessary loans to show that they are also cash constrained and cannot therefore help their relatives. We find that those arrangements follow a well defined pattern, whereby elder siblings support their younger siblings in the early years, who then reciprocate by supporting the children of their elder siblings. We find however that these transfers negatively affect investment and effort: for example, having an elder sibling reduced the time spent working of a younger sibling by more than 20 per cent.
We carried out a census of microfinance groups in parts of Northern India, with a view to investigate the long run participation of traditionally disadvantaged villagers. We found that lower caste people are less likely to become permanent members of a self-help group, they are more likely to leave such groups and their groups are also more likely to fail. By contrast, poor landless agricultural workers draw large benefits from their participation and receive on average more than double the amounts of bank loans given to members with larger landholdings. In a parallel panel survey of 1500 families, we explored the long run consequences of participating to a micro finance group and found members of self-help groups were significantly more likely to enroll their children in school; these children were more likely to continue after completing compulsory education; and their dropout rates were lower. These effects are particularly strong for girls, and are accompanied by a decline in child labor.
Extended families are a major source of solidarity transfers in sub-Saharan Africa, and are subject to a host of implicit sanctions. We undertook an investigation of those arrangements among the Bamileke people of Western Cameroon, having documented from a set of preliminary interviews that people use a large variety of strategies to avoid requests for help. For instance, they may take unnecessary loans to show that they are also cash constrained and cannot therefore help their relatives. We find that those arrangements follow a well defined pattern, whereby elder siblings support their younger siblings in the early years, who then reciprocate by supporting the children of their elder siblings. We find however that these transfers negatively affect investment and effort: for example, having an elder sibling reduced the time spent working of a younger sibling by more than 20 per cent.