The Economic Returns to Social Interaction: Experimental Evidence from Microfinance

This study examines whether a development intervention that involves constant group interaction and standard microfinance lending, builds capital.

Background
The penetration of formal insurance among low-income populations in developing countries remains low. Under such circumstances, some researchers theorize that social capital can lead to better informal risk-sharing among households. By increasing the social ties between individuals, development organizations may be able to expand or deepen their informal risk-sharing networks and help the poor hedge against individual or household level-risks. Some experts believe that greater social capital can lead to other advantageous economic outcomes for the poor such as increased cooperation. For these reasons, many development organizations attempt to build social capital through programs that focus on community interaction and group activity. This study tested whether one development intervention that involves constant group interaction, standard microfinance lending, builds social capital. By closely tracking borrowing outcomes for groups that meet more frequently, the researchers attempted to quantify the returns to enhanced social capital.
Approach
The study was conducted in the impoverished urban and peri-urban parts of West Bengal, India, with the assistance of VWS using randomised evaluations. Researchers randomized traditional microfinance borrowing groups into either a monthly repayment cohort or a weekly repayment cohort. There were two kinds of experiments conducted. One was to test the effects of frequent interaction, the other to test trust among group members.
Key Findings
The study finds that weekly group members were 26% more likely to meet fellow members outside the group meetings compared to women who met monthly. Researchers found that while only about 10% of monthly group members had met everyone in their group socially in the last 30 days, 100% of members in the weekly group had met socially.  Weekly group members were 29% more likely to make transfers to their friends and distant family after the loan cycle. Though the study could not directly trace borrower to borrower transfers, it observed increased risk sharing through the trust game. Default risk decreased for the groups that met more frequently – weekly group members were 3.5 times less likely to default on their loans compared to the monthly group members.

Implications

Findings from the study suggest that there is a need to investigate whether similar development assistance programs are successful at boosting social capital and whether increases in social capital lead to economically significant outcomes.

Project Leads

Benjamin Feigenberg, Erica Field, Rohini Pande

Location

West Bengal

Partners

Village Financial Services

Status

Completed