Cultural Proximity and Loan Outcomes

59 Pages Posted: 19 May 2012 Last revised: 13 Jun 2021

See all articles by Raymond J. Fisman

Raymond J. Fisman

National Bureau of Economic Research (NBER); Boston University

Daniel Paravisini

London School of Economics & Political Science (LSE)

Vikrant Vig

London Business School

Date Written: May 2012

Abstract

We present evidence that shared codes, religious beliefs, ethnicity - cultural proximity - between lenders and borrowers improves the efficiency of credit allocation. We identify in-group preferential treatment using dyadic data on the religion and caste of bank officers and borrowers from a bank in India, and a rotation policy that induces exogenous matching between officers and borrowers. Cultural proximity increases lending on both intensive and extensive margins and improves repayment performance, even after the in-group officer is replaced by an out-group one. Further, cultural proximity increases loan dispersion and reduces loan to collateral ratios. Our results imply that cultural proximity mitigates informational problems that adversely affect lending, which in turn relaxes financial constraints and improves access to finance.

Suggested Citation

Fisman, Raymond and Paravisini, Daniel and Vig, Vikrant, Cultural Proximity and Loan Outcomes (May 2012). NBER Working Paper No. w18096, Available at SSRN: https://ssrn.com/abstract=2062729

Raymond Fisman (Contact Author)

National Bureau of Economic Research (NBER)

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Daniel Paravisini

London School of Economics & Political Science (LSE) ( email )

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Vikrant Vig

London Business School ( email )

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